Last week, in "Screening for Friends," we looked at how to use a free online screener to uncover undervalued companies. At The Motley Fool, we call such companies hidden gems. Hidden because they don't receive a lot of attention from Wall Street; gems because these companies are nonetheless cheaply valued relative to their strong cash flows and future growth prospects.
"Screening for Friends" cast a pretty wide net, first seeking out companies that appear to be hidden gems and then narrowing the list of candidates to only those with which you are already familiar. As we will see today, sometimes the screener sieves you out a gem; sometimes, a piece of gravel. The two companies I found when running the screen last week illustrate this point quite effectively.
Let's dispose of the gravel first. Burlington Coat Factory (NYSE:BCF) may be better known than Hidden Gems Watch List stock Goody's Family Clothing (NASDAQ:GDYS). But a quick look at the two companies' profiles on Yahoo! (NASDAQ:YHOO) Finance reveals that while Goody's is swimming in free cash flow, Burlington isn't. So let's immediately toss Burlington aside and focus on Goody's today.
Market cap
Goody's market cap of $270 million, give or take, places it squarely in small-cap country.
Enterprise value to free cash flow
Goody's $163 million enterprise value, divided by its $21.6 million in free cash flow, yields a super-discounted EV/FCF ratio of 7.5.
Historical and projected earnings growth
Goody's past performance has been erratic and shows no obvious pattern of earnings growth. But over the next five years, the company is expected to grow 15% per year on average.
EV/FCF/G
The three analysts following the company expect Goody's to grow at roughly the same rate as all other clothing stores, so we are not looking at any kind of super-retailer here. Goody's is not the next Wal-Mart (NYSE:WMT), is not a new soft-goods Home Depot (NYSE:HD), and bears little resemblance to Motley Fool Stock Advisor picks Dell (NASDAQ:DELL) and Amazon.com (NASDAQ:AMZN). Goody's is in all likelihood the proverbial "good company at a great price." In this case, the "price," or EV/FCF/growth ratio, turns out to be 0.5.
Return on equity
Goody's runs neither hot nor cold. Its return on equity is a middling 10.6%.
Insider ownership
Insiders have a high degree of confidence in this company, as demonstrated by the high level of insider ownership (38.7%).
Share dilution
Goody's shareholders get to keep the bulk of their company's profits, because the company keeps share dilution to a minimum -- an average of 1.4% per year over the past two years.
Conclusion
The valuation says it all here. The company is growing at or just slightly above the rate of industry growth, but dang if the stock ain't cheap. This company deserves a closer look from any Fool who seeks a large margin of safety in investing.
Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article. The Fool has a disclosure policy .
