To create this list we wanted to identify rallying stocks with market cap above $300M. By "rallying" we mean that the stocks are performing above their 20-day, 50-day, and 200-day market averages (MA). To narrow our list down, we chose stocks that are operating at an additional 20% above their 200-day MA.
Furthermore, all of these names are undervalued relative to their industry when compared to the following valuation metrics:
- Trailing-12-month price to earnings ratio (TTM P/E)
- Price to earnings to growth ratio (PEG)
- Price to cash flow ratio
We search for undervalued companies because they provide investors with more bang for your buck. The lower the price multiples, the less investors have to pay for a dollar of earnings. As these stocks rally, they become more fairly valued relative to other companies.
Although this may be a simple way of finding undervalued companies, it is certainly a great place for you to start your own analysis.
Are you unclear on any of the terms above? Let's review:
Trailing 12 months (TTM): An indication that the calculated data has come from the last 12 months. For example, if data released in July 2012 is "TTM" (i.e., P/E TTM or Trailing P/E), this means the price and the earning-per-share data comes from the 12-month period of August 2011 to July 2012.
Rallying: When a stock is rallying it means it is performing above its market average for a given time period. It is presented as a % of performance relative to the average. When a stock is performing above its 20-day moving average (MA) as well as its 50 and 200 day market averages, it signals bullish momentum. All the stocks in this list are rallying above their 20, 50, and 200-day MA.
Market Capitalization (Market Cap): Market capitalization, commonly referred to as market cap, is the total market value of a company's outstanding shares. It can be thought of as a measure of company's size. It can be calculated by multiplying the number of shares by the current price of the shares. Companies with higher market cap are considered to have more trustworthy information because they have greater histories of profitability and data.
Example, If company X has 15 million outstanding shares valued at $25 a share, the market cap would be $15M x $25 = $375M. If Company's X's stock price rises to $30 then the new market value will be $450 Million ($15M x $30 = $450M).
Price to Earnings Growth Ratio (PEG): To understand PEG, we start with the Price/Earnings ratio (P/E), a widely used tool for valuing a stock. P/E is short for the share price relative to earnings per share (EPS). The ratio indicates how much investors are paying for a dollar of earnings.
P/E = (Share Price)/(EPS)
It is important to remember that share prices take into account expected future earnings growth. So investors might be willing to pay a high price today if they expect a company's earnings to grow significantly in the future. This makes comparing P/E ratios complicated -- some industries have high earnings growth trends, which inflates a company's P/E relative to companies in other industries.
This is where PEG ratios become handy. PEG is short for the Price/Earnings to Growth ratio. The PEG ratio takes the P/E ratio one step further by including a calculation for annual earnings (EPS) growth.
PEG = (P/E)/(Annual EPS Growth)
In general, a stock with a high PEG ratio is considered expensive or overvalued, while a stock with a low PEG ratio is considered cheap or undervalued.
Price to Free Cash Flow (P/FCF): Free cash flow is the amount of cash generated by a company in one year after subtracting short-term and long-term investments in the company, expenses, and taxes. It is the cash flow available to both debt and stock investors.
The ratio of stock price divided by free cash flow per share (P/FCF) is often used to compare the value of companies. As a general rule, P/FCF under 5 (or price is less than 5 times free cash flow per share) is considered "undervalued," which means the stock may be trading at too low of a price and may rise in the future to properly reflect the free cash flow generated by the firm.
Now that you're armed with information, given these strong profitability signals, do you think the value of these companies will continue to rise? Use the data below as a starting-off point for your own analysis.
List sorted by market cap. (Click here for free, interactive tools to analyze these ideas.)
1. UnitedHealth Group,
2. CIGNA Corporation
3. Discover Financial Services
4. Helmerich & Payne
5. Patterson-UTI Energy
7. Oil States International
8. AMERIGROUP Corporation
9. Education Management Corporation
10. NewMarket Corp.
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.
Kapitall's Becca Lipman does not own any of the shares mentioned above.
The Motley Fool owns shares of UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of AMERIGROUP, UnitedHealth Group, and Discover Financial Services. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group.
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