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I have searched for profitable companies with very strong growth prospects that are trading at a deep discount to their fair values after reporting disappointing financial results, but may have room to rally when their businesses improve. Those stocks would have to show zero debt and have their enterprise values well below their market caps.

Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Since the enterprise value can serve as the theoretical takeover price of the company, when its value is well below the market cap, it is possible to consider the company's stock in a deep discount.

I have elaborated a screening method which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.

The screen's formula requires all stocks to comply with all following demands:

  1. Average annual sales growth for the past 5 years is greater than 15%.
  2. Average annual earnings growth for the past 5 years is greater than 15%.
  3. Average annual earnings growth estimates for the next 5 years is greater than 15%.
  4. The Quick Ratio is greater than 6.00.
  5. The PEG Ratio is less than 1.10.
  6. Total debt is zero.
  7. The Enterprise Value is less than the Market Cap of the company.

After running this screen on December 06, 2012, before the market open, I obtained as results the 4 following stocks:

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AXT Inc. (NASDAQ:AXTI)

AXT, Inc. designs, develops, manufactures, and distributes compound and single element semiconductor substrates for use in wireless communications, lighting display applications, and fiber optic communications.

AXT, Inc. has no debt at all and the PEG ratio is very low at 0.66. The current ratio is very high at 9.54 and the quick ratio is also very high at 6.03. AXTI records strong growth on all key parameters; the average annual earnings growth for the past 5 years was very high at 82.07%, the average annual sales growth for the past 5 years was also quite high at 18.56% and the average annual earnings growth estimates for the next 5 years is very high at 23%. The company is trading 57.6% below its 52-week high and has 38% upside potential based on the consensus mean target price of $4.00. Among the six analysts covering the stock, three rate it as a strong buy and three rate it as a hold.

On November 01, AXT Inc. reported its 3Q financial results (here). On that occasion, Morris Young, president and CEO said:

Business conditions in the third quarter were in keeping with the expectations that we outlined when we announced our results last quarter. The compound semiconductor substrate market is currently experiencing a correction, largely driven by weaker demand and a moderate amount of excess inventory in the channel. However, our solid execution over the last many quarters is allowing us to weather the current down cycle and we are using this time to support significant qualifications that are still ongoing and to focus our resources on strategic geographies and applications that are likely to benefit AXT in the future. We view improving market conditions, new customer qualifications and a bottoming of raw material pricing as key catalysts for our growth in the coming year and beyond

The compelling valuation metrics, the strong growth prospects, the analysts' recommendation and the fact that the AXTI stock is selling way below book value (price to book value is only 0.66); all these factors make the AXTI stock very attractive.

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Chart: finviz.com

3SBio Inc. (NASDAQ:SSRX)

3SBio Inc., a biotechnology company, engages in the research and development, manufacture, and distribution of pharmaceutical products in the People's Republic of China.

3SBio Inc. has no debt at all and the PEG ratio is quite low at 1.09. The current ratio is very high at 16.38 and the quick ratio is also very high at 15.87. AXTI records strong growth on all key parameters; the average annual earnings growth for the past 5 years was quite high at 17.78%, the average annual sales growth for the past 5 years was also very high at 33.49% and the average annual earnings growth estimates for the next 5 years is quite high at 16%. The company is trading 13.18% below its 52-week high and has 65% upside potential based on the consensus mean target price of $21.98. All four analysts covering the stock rate it as a buy. The stock price is 0.99% above its 20-day simple moving average, 0.06% above its 50-day simple moving average and 3.82% above its 200-day simple moving average, which indicates short-term, mid-term and long-term uptrend. The compelling valuation metrics, the strong growth prospects, the analysts' recommendation and the fact that the SSRX stock is in an uptrend; all these factors make the SSRX stock quite attractive.

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Chart: finviz.com

Syntel, Inc. (NASDAQ:SYNT)

Syntel, Inc. provides information technology and knowledge process outsourcing services worldwide.

Syntel has no debt at all and the PEG ratio is very low at 0.81. The trailing P/E is very low at 13.13 and the forward P/E is even lower at 12.89. The current ratio is very high at 6.20 and the quick ratio is also very high at 6.02. SYNT records strong growth on all key parameters; the average annual earnings growth for the past 5 years was quite high at 18.91%, the average annual sales growth for the past 5 years was also quite high at 18.91% and the average annual earnings growth estimates for the next 5 years is also quite high at 16.23%. The company is trading 13.42% below its 52-week high and has 26% upside potential based on the consensus mean target price of $70.88. On December 4, Syntel lowered its 2012 financial projections (here), which sent shares of the outsourcing services company down sharply in trading. The company said that one of its customers recently decided to reduce its spending for the rest of 2012 only. As a result, the company's revenue will be limited. Syntel said it expects to earn $4.26 to $4.29 per share for the year on revenue between $720 million and $722 million. That compares with its prior forecast from October of earnings between $4.36 to $4.40 per share and revenue between $730 million to $735 million. In my opinion, the SYNT stock is still attractive, despite the fact that it lowered its financial projections, due to the attractive valuation multiples and the strong growth prospects.

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Chart: finviz.com

Volterra Semiconductor Corporation (NASDAQ:VLTR)

Volterra Semiconductor Corporation engages in the design, development, and marketing of analog and mixed-signal power management semiconductors for computing, storage, networking, and consumer markets.

Volterra Semiconductor has no debt at all and the PEG ratio is quite low at 0.94. The trailing P/E is at 18.76 and the forward P/E is very low at 12.60. The current ratio is very high at 11.88 and the quick ratio is also very high at 10.62. VLTR records strong growth on all key parameters; the average annual earnings growth for the past 5 years was very high at 24.46%, the average annual sales growth for the past 5 years was quite high at 15.90% and the average annual earnings growth estimates for the next 5 years is also very high at 20%. The company is trading 51.59% below its 52-week high and has 41% upside potential based on the consensus mean target price of $23.88. On October 22, Volterra Semiconductor reported its 3Q financial results (here). Net revenue for the third quarter of 2012 was $42.1 million, a 3% decrease from $43.6 million in the second quarter of 2012, and a 2% increase from $41.3 million in the third quarter of 2011. GAAP net income was $6.1 million, or $0.23 per share (diluted), a 1% increase from $6.0 million, or $0.22 per share (diluted) in the second quarter of 2012, and a 13% decrease from $6.9 million, or $0.26 per share (diluted), in the third quarter of 2011. Jeff Staszak, Volterra president and CEO, said:

We are pleased that we will have greater growth in 2012 than 2011 after another challenging year from a macro economic standpoint. I am optimistic that 2013 will bring more growth as the macro economic situation rebounds, our customers return to a normalized growth mode and as new product cycles materialize.

The very low multiples and the strong growth prospects make the VLTR stock quite attractive.

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Chart: finviz.com

Source: 4 High-Growth Stocks In Deep Discount With Big Upside Potential