In the search for companies that are undervalued but show promise of positive growth, we screened for potentially undervalued names that are currently experiencing upward momentum.
One of the most popular technical indicators is momentum -- the idea that recent trading trends for a stock may persist as more investors follow suit.
For instance, a stock that is trading above its 20-day, 50-day, and 200-day moving averages (MA) is clearly surrounded by positive investor sentiment, and that idea may resound with investors for some time to come.
Additional screening for undervalued stocks
From this universe, we collected data on levered free cash flow and identified the companies most undervalued relative to their levered free cash flows.
Levered free cash flow, or the free cash flow available after paying interest on debt, is a helpful way to gauge 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 firm is valued too low. At the very least, it indicates that the company is producing a lot of cash.
We applied both of these concepts to a universe of stocks, with market caps above $300 million that are trading above their 20-day, 50-day and 200-day moving averages, and technically undervalued by the LFCF/EV ratio.
Do you think these companies are truly undervalued? Do you think they have the momentum to push even higher? Use this list as a starting-off point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. Cedar Shopping Centers
2. Asbury Automotive Group
3. Tessera Technologies
4. Lions Gate Entertainment
5. Bridgepoint Education
6. Dollar Thrifty Automotive Group: Dollar Thrifty Automotive Group, through its subsidiaries, rents and leases vehicles through company owned and franchised stores under Dollar and the Thrifty brand names primarily in the United States and Canada. Earnings per share expected to grow by 36% over the next five years. The stock is currently trading 2% above the 20-day SMA, 6.54% above the 50-day SMA, and 3.81% above the 200-day SMA. Levered free cash flow at $296.41M vs. enterprise value at $2.89B (implies a LFCF/EV ratio at 10.26%).
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.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above.