When stock analysts endeavor to determine a company's valuation, they often use enterprise value as an alternative to market capitalization. Enterprise value is a figure that theoretically represents the entire cost of a company if someone were to acquire it.
So why do some analysts favor this metric? Joshua Kennon at About.com explains: "Enterprise value is a more accurate estimate of takeover cost than market capitalization because it takes includes a number of important factors such as preferred stock, debt, and cash reserves that are excluded from the latter metric."
Here's how it's calculated: First, take the sum of a company's market cap, preferred stock and outstanding debt. Then, subtract its cash and cash equivalents (found on the corporate balance sheet). This leaves you with the amount it would cost to purchase the entirety of a company's common stock, preferred stock, and outstanding debt.
Value investors will look for companies that are generating a lot of cash flow in relation to enterprise value, says Kennon. "Businesses that tend to fall into this category are more likely to require little additional reinvestment; instead, the owners can take the profit out of the business and spend it or put it into other investments."
To create today's list, we started with about 200 stocks in rally mode. We then collected data on enterprise value and levered free cash flow, and ultimately identified the most undervalued rally stocks by the levered free cash flow to enterprise value (LFCF/EV) ratio. (Note: Levered free cash flow is the amount of cash available to stockholders after interest payments on debt are made)
Do you think these undervalued rally stocks have more upside? Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. WellCare Health Plans
3. Domtar Corporation
4. Bridgepoint Education
5. Primoris Services Corporation
6. GT Solar International
7. Kulicke & Soffa Industries
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. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.