It's easy to look at a company's top-line sales numbers to see whether business activity is rising or falling, but a comparison with inventory can provide a much closer look at a company's sales trends.
Inventory can represent two things: the company's expectation of what they will soon sell, and also what the company has not yet sold. Therefore, a growing inventory by itself can mean a more positive sales outlook, or the inability to sell products.
However, compared with revenue, inventory tells a different story. If inventory grows faster than revenue, it probably indicates that the company is having trouble selling its inventory.
Of course, other explanations can exist, such as changes in company policy.
To demonstrate this, we ran a screen on over 4,000 U.S.-traded stocks for those exhibiting positive trends in inventory vs. revenue, with growth in quarterly revenue out-pacing growth in inventory as well as inventory becoming a smaller portion of current assets.
We also wanted to screen for companies that appear undervalued. One way to search for potentially undervalued stocks is by comparing current price to analyst target prices, with stocks trading at significant discounts to target appearing undervalued.
Of course, analyst prices tend to be inflated most of the time, so we ran a screen that used the most pessimistic analyst target price as the benchmark for our analysis.
In addition, we only focused on companies that have more than five analyst target prices (to make sure we only focus on companies that have decent analyst coverage).
The screen produced 10 stocks, listed below. Do you think these potentially undervalued companies have strong operations?
List sorted alphabetically. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Ceragon Networks
3. GenOn Energy
6. PowerSecure International
7. Schnitzer Steel Industries
8. The Spectranetics
10. ZOLL Medical
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 and Alexander Crawford do not own any of the shares mentioned above. Accounting data sourced from Google Finance, target price data sourced from Thomson/First Call (via Yahoo! Finance).
Motley Fool newsletter services have recommended buying shares of Ceragon Networks. 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.