Do you perform due diligence on company management instead of buying stocks purely on valuation? More often, fundamentals, and company management are more important than just stock valuation and technical analysis. We looked for companies with this in mind.
We started by looking for companies with a return on assets (ROA) above the industry average. We performed a deep dive analysis of the income statements, and balance sheets for companies on our list to calculate the return on assets (ROA). ROA tells us how efficient management is at using its assets to generate earnings. Simply put, ROA shows you the earnings the company generated from invested capital.
Return on Assets = Net Income/Total Assets
We went a step further to look for stocks that are undervalued by the levered free cash flow/enterprise value ratio. This ratio gives us the money that the business can use to grow and pay to shareholders.
Interactive Chart: Press Play to compare changes in analyst changes over the last two years for the five stocks mentioned below.
We are left with 4 companies that look undervalued by levered free cash flow, and provide a ROA better than its industry average. Also, notice that their ROA is at least 5% above the industry average. They are listed in detail below.
Would you invest in these companies? Use this list as a starting point of your analysis.
1. CF Industries Holdings, Inc. (CF): Manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide.
- Market cap at $14.39B, most recent closing price at $228.91.
- Levered free cash flow at $1.46B vs. enterprise value at $13.88B (implies a LFCF/EV ratio at 10.52%).
- TTM Return on Assets at 19.18% vs. an industry average at 8.87%.
2. Capella Education Co. (CPLA): Provides online postsecondary education services in the United States.
- Market cap at $346.73M, most recent closing price at $27.28.
- Levered free cash flow at $46.19M vs. enterprise value at $231.42M (implies a LFCF/EV ratio at 19.96%).
- TTM Return on Assets at 17.52% vs. an industry average at 8.3%.
3. Hollysys Automation Technologies, Ltd (HOLI): Provides automation and control technology and applications in the People's Republic of China.
- Market cap at $726.88M, most recent closing price at $12.98.
- Levered free cash flow at $69.34M vs. enterprise value at $622.12M (implies a LFCF/EV ratio at 11.15%).
- TTM Return on Assets at 10.84% vs. an industry average at 4.61%.
4. Scripps Networks Interactive, Inc. (SNI): Operates as a lifestyle content and Internet search company in the United States and internationally.
- Market cap at $9.18B, most recent closing price at $61.27.
- Levered free cash flow at $1.04B vs. enterprise value at $10.26B (implies a LFCF/EV ratio at 10.14%).
- TTM Return on Assets at 13.26% vs. an industry average at 5.95%.
* All accounting data sourced from Google Finance
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.