Interested in bullish momentum ideas? How about undervalued stocks? If so, this list may be an excellent starting point for your own analysis.
To create the following list, we started with a universe of stocks with market caps above $300 million and searched among them names experiencing the "golden cross." The golden cross is a bullish momentum indicator that signals the stock's 50-day moving average has eclipsed its 200-day moving average.
From those names we searched for companies that appear undervalued by the levered free cash flow to enterprise value ratio.
Our final list is below. But first let's quickly review the key implications of these criteria:
If a stock's 50-day moving average crosses above its 200-day moving average, it is called a golden cross. This is typically seen as a bullish signal. It is thought to be a significant favorable turning point, especially if the trend is confirmed by higher trading volume.
The opposite of the golden cross, when the 50-day moving average crosses below the 200-day moving average, is called a "death cross." This is a serious signal of a downtrend.
Levered free cash flow is a calculation of the amount of cash that a company holds after it has paid taxes, repayments on its debts, and any expenditure to maintain or expand business (capital expenditures). In other words, levered free cash flow is the money that the business can use to grow and pay dividends to shareholders.
Enterprise value is an alternative measure of a company's value (instead of using market cap). Theoretically, it is the cost of taking over a company, calculated as market cap plus debt and liabilities minus cash. For example, if Company A were to buy 100% of Company B, it would need to buy all the outstanding shares, the value of which is the market cap. Company A would then be stuck with any debts and liabilities that Company B had. But Company A would also get all of the cash that Company B had in the bank, which would help pay off the debts, etc.
Because cash is an important asset for a company (it allows them to buy new machines, hire more people, etc.) and because it is hard to lie about how much cash a company has, a company that holds more cash is seen to be of better value.
The levered free cash flow to enterprise value ratio is one method of measuring the value of a company. The more free cash a company has relative to its enterprise value (a high ratio), the cheaper the company appears.
Do you think these companies are undervalued? Will they continue their bullish momentum? Use the following information as a starting point for your own analysis.
(Click here to access free, interactive tools to analyze these ideas.)
1. Advance America, Cash Advance Centers
2. Cubist Pharmaceuticals
4. CVR Energy
5. Medicis Pharmaceutical
Interactive chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.