It is common knowledge that more risk has the possibility of yielding more reward, but it also brings a potentially larger downside. It is an investor's responsibility to produce returns while maintaining or reducing the risk taken.
A common way to do so is to search for potentially undervalued stocks, which are sometimes perceived as lower-risk investments. A popular valuation model is the price-to-earnings ratio, or P/E ratio, which calculates the current stock price divided by the earnings per share of the company. It shows how much you are paying for the earnings taken by the company.
The PEG ratio, or price-earnings growth ratio, shows the rate of growth of each of those compared to each other. If the price is rising faster than the earnings of the company, then the ratio will read over a 1, but if the earnings are growing faster than the stock price, it will read under a 1. If the PEG reads under a 1, then it can be considered undervalued. This ratio is often paired with the P/E ratio.
Additionally, investors like to have information on their stock before anyone else does (while maintaining legality) because it could affect the stock price. When information is unavailable, it's not a bad idea to look to the insiders of the company. They are the people who know the most about what is going on with a company, so it is common to follow the insider trades. If they're selling, it could mean that something is wrong, but if they're buying, then something big might be expected to happen.
Business section: Investing ideas
With that information in mind, we made a screen of small-cap companies that are undervalued according to the P/E ratio and PEG, then we checked those names' insider trading activity.
The stocks in this list have market caps from $300 million to $2 billion, P/E ratios under 15, PEGs under 1, and have net bullish insider trades over the last six months.
Do you think these undervalued stocks will be on the move soon?
List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)
1. Enstar Group
2. Newcastle Investment
3. Kraton Performance Polymers
4. American Public Education
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 Danny Guttridge does not own any of the shares mentioned above. Insider data sourced from Yahoo! Finance, all other data from Finviz.
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