Investors will often find themselves tempted to cash in on Wall Street's latest growth bubble, whatever it happens to be at the moment. It's easy to see the allure, as bubbles present the potential for exponential returns. But on the flip side, there's also an enormous risk of a sudden pop -- and that your life savings will go splat along with it.

Which is why many experts advocate a more prudent strategy. Rather than stuff your portfolio with the next big thing, they suggest instead stable, steady investments that offer a good value.

But how do you determine whether or not a company is undervalued? One method is to compare a stock's current price to its price to free cash flow ratio, which measures market price in relation to its annual free cash flow.

Free cash flow is a more inclusive cash flow metric that takes one-time expenses, capital expenses, dividend payments, and other non-occurring charges into account -- put simply, it's how much cash the company generated in the past 12 months. Generally speaking, a higher ratio means that the company is considered relatively expensive.

To compile this list, we started with a universe of stocks that have P/FCF ratios below 5, meaning free cash flow makes up more than 20% of the company's valuation. We then narrowed down the list by only focusing on those names that have seen insider buying over recent months.

Insiders seem to agree with the valuation ratios -- they appear to think these companies are undervalued, and they're putting their money where their mouths are. Here's a list of seven undervalued companies seeing insider buying. (Click here to access free, interactive tools to analyze these ideas.)

Valuation ratios sourced from Finviz, insider trading data sourced from AOL Money. The list has been sorted by the P/FCF ratio.

Company

P/Free Cash Flow

Insider Trends

Kohlberg Kravis Roberts (NYSE: KKR)

1.97

Robert Scully (Director) bought $1.0M worth of stock on 11/10

Hertz Global Holdings (NYSE: HTZ)

2.9

Bank of America (10% Owner) bought $357,785 worth of stock on 11/24

SUPERVALU (NYSE: SVU)

3

Steven Jungmann (Officer) bought $59,334 worth of stock on 10/21

Noranda Aluminum Holding (NYSE: NOR)

4.33

Robert Mahoney (CFO), Layle Smith (CEO) and Kyle David Lorentzen (COO) collectively bought $195,050 worth of stock between 11/2-12/14

Montpelier Re Holdings (NYSE: MRH)

4.43

John Roderick Heller (Director) bought $39,340 worth of stock on 11/30

PNC Financial Services Group (NYSE: PNC)

4.47

Helge Wehmeier (Director) bought $23,660 worth of stock on 10/1

Clearwater Paper (NYSE: CLW)

4.58

Insiders like Thomas Colgrove (Officer) and Gordon Jones (CEO) bought $254,184 worth of stock between 11/9-11/12

Interactive Chart: Press Play to compare changes in market cap for the names mentioned above. Note: The numbers on top of items represent the forward P/E ratio, if available.


Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.

Montpelier Re Holdings is a Motley Fool Stock Advisor choice. Montpelier Re Holdings is a Motley Fool Hidden Gems recommendation. The Fool owns shares of SUPERVALU. 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.