Value Ideas: Insiders Think These Cash-Rich Small-Cap Stocks Are Undervalued

Generally speaking, if a small-cap company is trading near its lowest price for the year, there's usually a good reason for its poor performance. Understandably, most investors may want to keep their distance from these high-risk market losers.

But some of these lemons could have a pretty sweet upside ... if you're willing to take on the risk.

Once a stock has taken a sufficient beating, chances are that most of the bad news has already been priced in to it -- so one more piece of negative information probably isn't going to sink its price much lower than it's already fallen. On the other hand, a single positive item could put a rocket on the stock.

But caveat emptor -- when you're dealing with small-cap stocks trading at dirt-cheap prices, you may be getting more (or less) than what you bargained for. Remember, companies trading near their lows carry a good deal of risk. If you're not careful, you could find yourself grasping at falling knives -- and that's a game you're sure to lose.

To help you find lower-risk names, we analyzed the cash holdings of about 230 small-cap stocks that have seen significant insider buying over the last six months. Insider executives know more about their company's prospects than anyone else, so if they're using their own cash to buy the shares of their employers, you'd better pay close attention.

To refine the list, we focused on levered free cash-flow, which measures how much cash is left after the company has paid all interest payments. A relatively high amount of cash ensures that the company will be able to pay its operating expenses, at least in the near term, lowering the risk around it.

So, if you have the patience to wait out the company's poor performance, you could potentially see some upside.

Here's a list of beaten-up small-cap stocks with significant levered free cash-flow relative to enterprise value. Insiders think the bad news is already priced into these names -- do you agree? (Click here to access free, interactive tools to analyze these ideas.)

1. Maiden Holdings (Nasdaq: MHLD): Property & Casualty Insurance Industry. Market cap of $633.13M. Over the last six months, insiders have been net buyers of 134,464 shares, which represents about 0.27% of the company's float of 50.60M shares. Trailing 12 month levered free cash flow at $227.28M, which is equivalent to 30.26% of the company's $750.97M enterprise value.

2. Lincoln Educational Services (Nasdaq: LINC): Education & Training Services Industry. Market cap of $330.57M. Over the last six months, insiders have been net buyers of 291,384 shares, which represents about 1.38% of the company's float of 21.18M shares. Trailing 12 month levered free cash flow at $76.59M, which is equivalent to 23.66% of the company's $323.76M enterprise value.

3. Aastrom Biosciences (Nasdaq: ASTM): Biotechnology Industry. Market cap of $120.11M. Over the last six months, insiders have been net buyers of 46,919 shares, which represents about 0.12% of the company's float of 38.43M shares. Trailing 12 month levered free cash flow at $15.15M, which is equivalent to 17.% of the company's $89.11M enterprise value.

4. PH Glatfelter (NYSE: GLT): Paper & Paper Products Industry. Market cap of $682.31M. Over the last six months, insiders have been net buyers of 31,000 shares, which represents about 0.07% of the company's float of 45.56M shares. Trailing 12 month levered free cash flow at $105.65M, which is equivalent to 11.75% of the company's $899.44M enterprise value.

5. CKX (Nasdaq: CKXE): Entertainment Industry. Market cap of $507.5M. Over the last six months, insiders have been net buyers of 50,000 shares, which represents about 0.07% of the company's float of 68.88M shares. Trailing 12 month levered free cash flow at $62.39M, which is equivalent to 11.72% of the company's $532.44M enterprise value.

*Levered free cash-flow and enterprise value data sourced from Yahoo! Finance. Data sourced on Friday afternoon, May 27.

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.