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I focus on value small-cap and mid-cap stocks. The screens I use sort for stocks with manageable debt to equity ratios, good price to free cash flow ratios, cash on hand, and a solid return on equity. Omega Protein Corporation (OME) and Atmel Corporation designs (ATML) are two of many that fit the screen profile. I build my portfolio with companies, like Omega and Atmel, that offer an excellent mix of deep value and fundamental strength.

Omega is a processor, marketer, and distributor of fish meal and fish oil products in the United States. It is vertically integrated, giving it a significant competitive advantage. Atmel develops, manufactures, and sells a wide range of products, including microcontrollers, advanced logic, mixed-signal, nonvolatile memory and radio frequency components. Atmel derives the majority of its revenue from touchscreen microcontrollers, and has partnered with Amazon, Microsoft, and Samsung recently. I ran a discounted free cash flow valuation analysis at a 12% discount rate for both companies.

Omega has excellent fundamentals, with a market cap at about $125 million, $18 million in free cash flow, $41 million in cash on hand, and $28 million in debt. The debt to cash ratio of 0.48 is very good. Omega has five year free cash flow growth at about 11.2%. That growth is somewhat tame, but even at a lower growth rate, Omega is a good value. If we give Omega a 3% future growth rate, that would give us a fair value of about $13.41 and a 52% margin of safety. At a more optimistic growth rate of 6%, I place fair value at $15.62 with a 59% margin of safety. If growth continues at 11.2%, that would give us a fair value of about $20.46 and a 68% margin of safety. I prefer the conservative 3% growth projection, and at least a 50% margin of safety; that would put a buy price at $6.7 or under.

Atmel fundamentals are solid, with a $3.03 billion market cap, $289 million in cash on hand, free cash flow of $164 million, and no debt. The five year free cash flow growth is excellent at a rate of 29.8%. If we give Atmel a more modest future growth rate of 15%, we get a fair value of $24.95 and a 73% margin of safety. If growth plummets to 5%, I place fair value at $14.83, which would still give us a 54% margin of safety. If growth continues at 29.8%, that would give us a fair value of $54.92, and an exceptional 88% margin of safety. If we play it very safe and forecast growth at 5% and use at least a 50% margin of safety, our buy price would be at $7.41 or under.

Source: 2 Deep Value Stocks With Excellent Fundamentals