If you're interested in searching for profitable companies, this list might interest you.
To create this list, we started with a universe of about 200 undervalued stocks, based on the price/earnings-to growth (PEG) and price-to-free cash flow (P/FCF) ratios.
To refine the list, we identified the final group of undervalued stocks that have proved themselves to be more profitable than their competitors.
Interested in learning more about these terms? Let's review:
Price to earnings growth: The P/E ratio is 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)
Therefore, the higher the earnings growth, the lower the PEG ratio. So a company that looks overvalued because of its relatively high P/E might look like a better investment if you take into account its high earnings 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: Free cash flow is the amount of cash a company generates 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, a P/FCF under 5 (meaning the 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 the company generates.
Trailing 12 months (TTM): This is an indication that the calculated data has come from the past 12 months. For example, if data released in July 2045 is "TTM" (i.e., P/E TTM or "Trailing P/E"), this means the price and the earnings-per-share data comes from the 12-month period of August 2044 to July 2045.
TTM gross margin: This metric that tells us the percentage of a company's revenue left after paying all production expenses. Costs include overhead, payroll, and taxation.
(revenues - cost of goods sold) / revenue ) * 100 = gross margin %
TTM operating margin: This tells us the percentage remaining after all operating expenses are paid. Operating expenses include supplies, repairs, research and development, and depreciation.
(operating income / net operating revenue) * 100 = operating margin %
TTM pretax margin: A company's earnings before taxes. This incorporates all of the expenses associated with business, excluding taxes. It can help to determine the company's overall operating efficiency. The higher the pretax margin, the more profitable the company.
(net profit before taxes / net sales) * 100 = pretax margin
Now that you're armed with this information, do you think these companies can continue to produce higher-than-average profit margins? Use this list as a starting-off point for your own analysis. (Get access to free, interactive tools to analyze these ideas.)
1. Calamos Asset Management
2. Capital One Financial
3. Discover Financial Services
4. East West Bancorp
5. FBL Financial Group
7. Protective Life
8. Symetra Financial
10. LIN TV
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.
Disclosure: Kapitall's Eben Esterhuizen does not own any of the shares mentioned above. Profitablilty data sourced from Fidelity; all other data sourced from Finviz.