In the search for companies that have outperformed in a persistent way, we ran a screen on undervalued stocks for those that have seen a persistence of days in which the stock beat the Standard & Poor 500 benchmark over the last month, and little persistence in underperforming the S&P 500 -- i.e., long winning streaks and short losing streaks -- as measured by a ratio of the longest winning streak to the longest losing streak.
Winning streaks and why they are important to keep an eye on
Comparing a stock's performance to the S&P 500 index is a common tool of investors. The index is comprised of 500 stocks, trading on the U.S. stock market, chosen for their size, dominance in the industry, liquidity, and several other factors. Standard & Poor's committee of analysts and economists has carefully chosen each stock on this list. The index is commonly used as a representation of the overall stock market, and in some sense an indication of the overall U.S. economy.
Outperforming the index is therefore considered a powerful signal of the company's strength. Stocks that win out the stock market may also be working off of a strong momentum that can persist for a long time.
Although past performance is no guarantee of future results, winning streaks -- when the time periods in which the stock is outperforming the S&P 500 greatly outnumber the times it is underperforming -- may indicate upward momentum and positive sentiment
To create the final list, we collected data on about 190 stocks that have seen long and sustained winning streaks over the last 30 days.
Additional screening for undervalued stocks
From this universe, we collected data on levered free cash flow, and identified the companies most undervalued relative to enterprise value.
Levered free cash flow, or the free cash flow available after paying interest on debt, is a helpful way to measure firm value because it is the cash flow available to shareholders. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. From this value we subtract cash holdings because, in the event of a takeover, that cash would be used toward the takeover price.
When the ratio of levered free cash flow to enterprise value is high, it may indicate that the price is too low. At the very least, it indicates that the company is producing a lot of cash.
The list
Even though these companies have had a great month relative to the rest of the market, they still appear to be undervalued -- do you agree?
List sorted by the size of the average alpha. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Denison Mines (NYSE: DNN ) : Engages in the exploration, development, mining, and milling of uranium primarily in the United States and Canada. Levered free cash flow at $86.59M vs. enterprise value at $489.53M (implies a LFCF/EV ratio at 17.69%). The stock's average daily alpha vs. the S&P 500 index stands at 2.06% (measured close to close, over the last month). During this period, the longest winning streak lasted 6 days (i.e. the stock's daily returns outperformed the S&P 500 for 6 consecutive days). The longest losing streak lasted 2 days (i.e. a win streak / losing streak ratio of 3.).
2. Majesco Entertainment (Nasdaq: COOL ) : Provides interactive entertainment products primarily in the United States and Europe. Levered free cash flow at $11.71M vs. enterprise value at $107.77M (implies a LFCF/EV ratio at 10.87%). The stock's average daily alpha vs. the S&P 500 index stands at 1.98% (measured close to close, over the last month). During this period, the longest winning streak lasted 8 days (i.e. the stock's daily returns outperformed the S&P 500 for 8 consecutive days). The longest losing streak lasted 2 days (i.e. a win streak / losing streak ratio of 4.).
3. Chart Industries (Nasdaq: GTLS ) : Chart Industries, manufactures and supplies engineered equipment used in the production, storage, and end-use of hydrocarbon and industrial gases in the United States and internationally. Levered free cash flow at $179.34M vs. enterprise value at $1.57B (implies a LFCF/EV ratio at 11.42%). The stock's average daily alpha vs. the S&P 500 index stands at 1.5% (measured close to close, over the last month). During this period, the longest winning streak lasted 5 days (i.e. the stock's daily returns outperformed the S&P 500 for 5 consecutive days). The longest losing streak lasted 2 days (i.e. a win streak / losing streak ratio of 2.5).
4. hiSoft Technology International (Nasdaq: HSFT ) : Provides outsourced information technology (IT) and research and development services in North America, Europe, and Asia. Levered free cash flow at $53.25M vs. enterprise value at $274.48M (implies a LFCF/EV ratio at 19.4%). The stock's average daily alpha vs. the S&P 500 index stands at 1.42% (measured close to close, over the last month). During this period, the longest winning streak lasted 5 days (i.e. the stock's daily returns outperformed the S&P 500 for 5 consecutive days). The longest losing streak lasted 2 days (i.e. a win streak / losing streak ratio of 2.5).
5. Xyratex (Nasdaq: XRTX ) : Provides modular enterprise-class data storage solutions and storage process technology. Levered free cash flow at $63.68M vs. enterprise value at $259.12M (implies a LFCF/EV ratio at 24.58%). The stock's average daily alpha vs. the S&P500 index stands at 1.25% (measured close to close, over the last month). During this period, the longest winning streak lasted 5 days (i.e. the stock's daily returns outperformed the S&P 500 for 5 consecutive days). The longest losing streak lasted 2 days (i.e. a win streak / losing streak ratio of 2.5).
6. Build-A-Bear Workshop (NYSE: BBW ) : Operates as a specialty retailer of plush animals and related products. Levered free cash flow at $13.68M vs. enterprise value at $83.41M (implies a LFCF/EV ratio at 16.4%). The stock's average daily alpha vs. the S&P500 index stands at 1.13% (measured close to close, over the last month). During this period, the longest winning streak lasted 5 days (i.e. the stock's daily returns outperformed the S&P 500 for 5 consecutive days). The longest losing streak lasted 1 day (i.e. a win streak / losing streak ratio of 5.).
7. Cloud Peak Energy (NYSE: CLD ) : Engages in coal mining operations in the Powder River Basin of the United States. Levered free cash flow at $210.11M vs. enterprise value at $1.89B (implies a LFCF/EV ratio at 11.12%). The stock's average daily alpha vs. the S&P 500 index stands at 1.09% (measured close to close, over the last month). During this period, the longest winning streak lasted 7 days (i.e. the stock's daily returns outperformed the S&P 500 for 7 consecutive days). The longest losing streak lasted 2 days (i.e. a win streak / losing streak ratio of 3.5).
8. CTC Media (Nasdaq: CTCM ) : Operates as an independent broadcasting company in Russia. Levered free cash flow at $410.87M vs. enterprise value at $1.76B (implies a LFCF/EV ratio at 23.34%). The stock's average daily alpha vs. the S&P 500 index stands at 0.96% (measured close to close, over the last month). During this period, the longest winning streak lasted 7 days (i.e. the stock's daily returns outperformed the S&P 500 for 7 consecutive days). The longest losing streak lasted 3 days (i.e. a win streak / losing streak ratio of 2.33).
9. Omega Protein (NYSE: OME ) : Distributes fish meal and fish oil products in the United States. Levered free cash flow at $20.93M vs. enterprise value at $197.09M (implies a LFCF/EV ratio at 10.62%). The stock's average daily alpha vs. the S&P 500 index stands at 0.96% (measured close to close, over the last month). During this period, the longest winning streak lasted 5 days (i.e. the stock's daily returns outperformed the S&P 500 for 5 consecutive days). The longest losing streak lasted 2 days (i.e. a win streak / losing streak ratio of 2.5).
10. Teradyne (NYSE: TER ) : Provides automatic test equipment products and services worldwide. Levered free cash flow at $207.79M vs. enterprise value at $1.75B (implies a LFCF/EV ratio at 11.87%). The stock's average daily alpha vs. the S&P 500 index stands at 0.92% (measured close to close, over the last month). During this period, the longest winning streak lasted 5 days (i.e. the stock's daily returns outperformed the S&P 500 for 5 consecutive days). The longest losing streak lasted 2 days (i.e. a win streak / losing streak ratio of 2.5).
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.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. LFCF and price data sourced from Yahoo! Finance.
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