Do you consider yourself a contrarian investor? For ideas on how to search for potentially underestimated and undervalued names, we ran a screen.
We began by screening for stocks with bearish sentiment, with float shorts above 10%. We then screened for those that also appear undervalued relative to earnings growth, with PEG below 1.
Then to analyze these companies' profitability, we ran DuPont analysis on the names. DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Because increases in net margin and asset turnover are considered good things, DuPont focuses on companies with these positive characteristics: Increasing ROE along with,
•Decreasing leverage, (i.e. decreasing Asset/Equity ratio)
•Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)
Those companies that pass DuPont are seeing positive trends in the sources of their increasing profitability, which adds further weight to the idea that the names are profitable.
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.
Do you think these stocks should be trading higher? Use this list as a starting point for your own analysis.
1. Air Methods Corp. (AIRM): Provides air medical emergency transport services and systems in the United States. Market cap at $1.39B, most recent closing price at $108.0. PEG at 0.98 . Float short at 13.25%. MRQ net profit margin at 12.58% vs. 10.01% y/y. MRQ sales/assets at 0.207 vs. 0.188 y/y. MRQ assets/equity at 2.906 vs. 3.61 y/y.
2. Bio-Reference Laboratories Inc. (BRLI): Provides clinical laboratory testing services for the detection, diagnosis, evaluation, monitoring, and treatment of diseases primarily in the greater New York metropolitan area. Market cap at $699.7M, most recent closing price at $25.26. PEG at 0.96. Float short at 34.5%. MRQ net profit margin at 7.31% vs. 6.81% y/y. MRQ sales/assets at 0.577 vs. 0.531 y/y. MRQ assets/equity at 1.394 vs. 1.556 y/y.
3. Green Mountain Coffee Roasters Inc. (GMCR): Engages in the specialty coffee and coffee maker business. Market cap at $4.5B, most recent closing price at $28.95. PEG at 0.65. Float short at 37.89%. MRQ net profit margin at 8.43% vs. 7.86% y/y. MRQ sales/assets at 0.26 vs. 0.25 y/y. MRQ assets/equity at 1.507 vs. 1.582 y/y.
4. JetBlue Airways Corporation (JBLU): Provides passenger air transportation services in the United States. Market cap at $1.44B, most recent closing price at $5.06. PEG at 0.39. Float Short at 16.33%. MRQ net profit margin at 3.44% vs. 2.93% y/y. MRQ sales/assets at 0.183 vs. 0.173 y/y. MRQ assets/equity at 3.752 vs. 4.049 y/y.
5. PDL BioPharma, Inc. (PDLI): Engages in the management of antibody humanization patents and royalty assets, which consist of Queen et al. Market cap at $1.07B, most recent closing price at $7.64. PEG at 0.40. Float short at 13.72%. MRQ net profit margin at 57.% vs. 54.82% y/y. MRQ sales/assets at 0.341 vs. 0.31 y/y. MRQ assets/equity at -2.164 vs. -1.112 y/y.
6. Teradyne Inc. (TER): Provides automatic test equipment products and services worldwide. Market cap at $2.92B, most recent closing price at $15.56. PEG at 0.76. Float short at 10.76%. MRQ net profit margin at 19.13% vs. 16.47% y/y. MRQ sales/assets at 0.188 vs. 0.175 y/y. MRQ assets/equity at 1.38 vs. 1.433 y/y.
7. Valassis Communications Inc. (VCI): Operates as a media and marketing services company primarily in the United States. Market cap at $1.02B, most recent closing price at $26.0. PEG at 0.45. Float short at 27.62%. MRQ net profit margin at 7.01% vs. 5.2% y/y. MRQ sales/assets at 0.333 vs. 0.324 y/y. MRQ assets/equity at 3.385 vs. 3.497 y/y.
*Accounting data sourced from Google Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.