3 Undervalued Stocks With Significant Upside Potential

As an investor, I aim to find shares of quality companies trading at a discount so I can buy them on the cheap and hold them for the long term. Let's take a look at three such stocks for investors who believe that a company trading at a discount to its intrinsic value will outperform in the future.

Strong as an oak
Weyerhaeuser  (NYSE: WY  ) has a diversified business with solid fundamentals. The company makes various products from trees and operates in different business segments like timberland, wood products, real estate, and cellulose fibers. Weyerhaeuser has been exhibiting robust growth, with second-quarter revenue increasing to $2.1 billion from $1.7 billion year over year.

Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin has also increased from 14% to 21% during the same period. In July 2013, the company purchased Longview Timber for 100% equity interest. This deal has transferred the ownership of 645,000 acres of timberlands to Weyerhaeuser, increasing its timber holdings in the Pacific Northwest by 33% to approximately 2.6 million acres.

The acquisition is expected to make Weyerhaeuser's financials stronger, as the region provides excellent soil and climatic conditions to grow Douglas fir, which is preferred by most of the company's customers. Therefore, its robust revenue growth and strong EBITDA trend are expected to continue.

As the graph below shows, Weyerhaeuser has handily beaten both the S&P 500 and the S&P Global Timber and Forest Index -- and the outperformance is even greater when dividends are included.

WY Chart

WY data by YCharts.

This trend should continue as organic and inorganic growth results in incremental shareholder value creation. This point is also reinforced by the recent increase in its quarterly dividend by 10% to $0.22.

In terms of valuation, Weyerhaeuser is currently trading at a P/E of 26 with estimated earnings growth of 21% for 2014. This translates into a PEG ratio of 1.2 , making it attractive compared to its peers Boston Properties and Vornado Realty, which trade at respective PEG ratios of 2.1 and 5.3.

New in the race
RigNet (NASDAQ: RNET  ) is an oil field communication provider; the company provides upstream oil and gas industry (both offshore and onshore) with network-based services. RigNet, a small company with a market cap of $566 million and good growth prospects, started its business in 2001 and had an IPO in 2010.

The company's revenue growth has been robust, with a compound annual growth rate of 19% from fiscal 2009 to 2012. Adjusted EBITDA has also increased from $29 million in 2009 to $44 million in 2012, indicating increased operating-level efficiency and profits. Superior operating efficiency is also indicated by an improvement in operating and free cash flow.

The company is currently trading at a P/E of almost 40, with estimated growth of 43% in 2013. A PEG of 0.8  does suggest undervaluation and thus potential upside. RigNet's offshore market share has risen from 7% in 2005 to 30.5% in 2012, and this is indicative that the company has done well with its products and services in a competitive market.

A similar trend can be seen in the company's onshore market, where its market share is 16.5% for the United States. The company is in plans to expand its onshore and offshore market share by penetrating the market of newly built rigs, while at the same time acquiring existing rigs from competitors .

The graph below represents the global fixed and floating rigs that are scheduled to be delivered. With the delivery of these new rigs, the potential market size of the company's business will increase, translating to higher growth.

Attraction for chemicals
Cytec Industries (NYSE: CYT  ) is a specialty chemicals and materials company focused on developing, manufacturing, and selling products to a diverse range of end markets like aerospace, adhesives, automotive, and more. Its second quarter showed a 27% increase in revenue year over year. Its aerospace segment is one of the biggest contributors; the segment's sales popped 15%. Operating earnings jumped 35% in Q2. In-process separation is another revenue-generating segment, and the company is focusing on these two segments for future growth.

The industrial segment is not contributing to the company's revenue growth; Cytec has thus announced cost reduction plans for this segment. The plan involves centralization of logistics and planning activities, along with the closure of a small site in Germany. This should help improve margins. At a stock price of $78, Cytec is trading at just 16 times its 2013 estimates and 12.6 times its 2014 estimates. Moreover, the stock's PEG ratio is 0.75 for 2014, making it an attractive buy.

Bottom line
These stocks have exhibited robust growth and have strong financials. Considering the fact that they are undervalued, investors have an opportunity to get exposure at current levels with a two- to three-year time horizon.

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