Investing 101: 6 Rallying Stocks That Are Undervalued by Enterprise Value

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.

Momentum ideas
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.

The list
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 (NYSE: CDR  ) : Engages in the ownership, operation, development and redevelopment of supermarket-anchored community shopping centers and drug store-anchored convenience centers in the United States. Earnings per share expected to grow by 56.70% over the next five years. The stock is currently trading 11.51% above the 20-day SMA, 27.06% above the 50-day SMA, and 12.72% above the 200-day SMA. Levered free cash flow at $210.55M vs. enterprise value at $1.15B (implies a LFCF/EV ratio at 18.31%).

2. Asbury Automotive Group (NYSE: ABG  ) : Operates as an automotive retailer in the United States. Earnings per share expected to grow by 25.05% over the next five years. The stock is currently trading 8.98% above the 20-day SMA, 14.78% above the 50-day SMA, and 23.37% above the 200-day SMA. Levered free cash flow at $160.09M vs. enterprise value at $1.50B (implies a LFCF/EV ratio at 10.67%).

3. Tessera Technologies (Nasdaq: TSRA  ) : Develops and licenses miniaturization technologies for chip-scale, multichip, and wafer-level packaging, which enables companies to produce chips for digital audio players, digital cameras, personal computers, personal digital assistants, video game consoles, and mobile phones. Earnings per share expected to grow by 25% over the next five years. The stock is currently trading 7.45% above the 20-day SMA, 12.32% above the 50-day SMA, and 13.54% above the 200-day SMA. Levered free cash flow at $74.38M vs. enterprise value at $384.27M (implies a LFCF/EV ratio at 19.36%).

4. Lions Gate Entertainment (NYSE: LGF  ) : Engages in the motion picture production and distribution, television programming and syndication, home entertainment, family entertainment, new channel platforms, and digital distribution activities. Earnings per share expected to grow by 27.95% over the next five years. The stock is currently trading 6.61% above the 20-day SMA, 5.26% above the 50-day SMA, and 24.62% above the 200-day SMA. Levered free cash flow at $446.47M vs. enterprise value at $1.92B (implies a LFCF/EV ratio at 23.25%).

5. Bridgepoint Education (NYSE: BPI  ) : Provides postsecondary education services. Earnings per share expected to grow by 21.67% over the next five years. The stock is currently trading 5.53% above the 20-day SMA, 5.73% above the 50-day SMA, and 8.45% above the 200-day SMA. Levered free cash flow at $181.98M vs. enterprise value at $950.15M (implies a LFCF/EV ratio at 19.15%).

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.

The Motley Fool owns shares of Bridgepoint Education and Asbury Automotive Group. Motley Fool newsletter services have recommended creating a put write position in Bridgepoint Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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12/19/2014 4:04 PM
ABG $75.53 Up +0.53 +0.71%
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BPI $11.84 Up +0.30 +2.60%
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CDR $6.88 Up +0.04 +0.58%
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