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To create this list of potentially undervalued stocks we started by screening for recent net insider purchases representing at least 2% of share float. Since insiders work at the companies in question, they have more knowledge about the firm than outsiders. When they use their own money to buy their company's shares, it shows they are bullish about the firm's future and believe current share price is undervalued.

Next, we screened for bullish sentiment from "smart money" investors, selecting stocks with significant net institutional purchases representing at least 5% of share float in the current quarter. This buying data indicates that institutional investors such as hedge fund managers and mutual fund managers are optimistic about the stocks' future.

Finally, we looked for signs of undervaluation as illustrated by high ratios of levered free cash flow/enterprise value. Levered free cash flow - the cash remaining after deducting interest payments on outstanding debt - plays an important role in paying for dividends and further business expansion. When companies have ratios of levered free cash flow/enterprise value in excess of 10%, it may indicate that the company as a whole is being undervalued.

The List

For aninteractive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

"Smart money" investors and insiders believe these stocks have a promising future - do you agree? Use this list as a starting point for your analysis.

1. American Pacific Corp. (NASDAQ:APFC): Primarily manufactures fine chemicals, specialty chemicals, and propulsion products in the United States and Europe.

  • Market cap at $190.69M, most recent closing price at $24.51.
  • Over the last six months, insiders were net buyers of 199,302 shares, which represents about 4.04% of the company's 4.93M share float.
  • Net institutional purchases in the current quarter at 248.3K shares, which represents about 5.04% of the company's float of 4.93M shares. This is already more than the 138.7k shares net purchased in the prior quarter. The 2 top holders of the stock are Mill Road Capital Management LLC and Aegis Financial Corporation.
  • Levered free cash flow at $25.79M vs. enterprise value at $212.54M (implies a LFCF/EV ratio at 12.13%).

In line with hedge fund and insider optimism, American Pacific has a low short float at 0.73% compared to the Special Chemical industry average of 4.07%, suggesting perhaps that short sellers see limited downside in the stock. Furthermore, the company has reported strong earnings growth over the last year, with EPS growing by 312.65%.

Investors should note APFC has had difficulty clearing inventory. Revenue grew by -5.61% during the most recent quarter ($36.32M vs. $38.48M y/y). Inventory grew by 32.34% during the same time period ($57.98M vs. $43.81M y/y). Inventory, as a percentage of current assets, increased from 33.25% to 52.69% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31). American Pacific will report 2013 second quarter results Thursday May 9 after market close.

2. Janus Capital Group, Inc. (NYSE:JNS): Publicly owned asset management holding company.

  • Market cap at $1.69B, most recent closing price at $8.81.
  • Over the last six months, insiders were net buyers of 30,846,700 shares, which represents about 17.11% of the company's 180.32M share float. This was done over 23 purchase transactions and zero sales - a strong signal.
  • Net institutional purchases in the current quarter at 22.2M shares, which represents about 12.31% of the company's float of 180.32M shares. This is a notable shift from the last quarter which saw a total net institutional sales of 28,283,500 shares. The 2 top holders of the stock are Dai-Ichi Life Insurance Company Limited and Ariel Investments, LLC.
  • Levered free cash flow at $241.75M vs. enterprise value at $1.37B (implies a LFCF/EV ratio at 17.65%).

First quarter profits are up 24% despite net outflows of $3.9 billion from its funds. This was offset by $11 billion in market gains. As Seeking Alpha contributor Serkan Unal pointed out, "The company is heavily exposed to equities, which bodes well for its growth during the equity market's bull phase. In particular, this could work to the company's favor once there is a rotation out of bonds and into equities - which still has to materialize."

Indeed, but investors will want to keep a wary eye on the outflows, and given the large percentage of Janus' assets in equities, another eye on the market. Morningstar anticipated it will take years of market outperformance for the firm to overcome its performance-based advisor fee deficit, and that any significant market drops or volatility could devastate operations.

On the bright side, the company also increased their regular quarterly dividend up 17%, from 6 to 7 cents. Smart Consensus upgraded it from a "sell" on 4/26/13 to "hold". As of April 26, 2013 Janus has a 12 month target price of $9 from Barclays Capital Management and $10 from Zacks, a potential 2.15% - 13.5% upside from recent closing price.

3. Navistar International Corporation (NYSE:NAV): Through its subsidiaries, manufactures and sells commercial and military trucks, buses, diesel engines, recreational vehicles (RVs), and chassis, as well as provides service parts for trucks and trailers.

  • Market cap at $2.65B, most recent closing price at $33.12.
  • Over the last six months, insiders were net buyers of 3,353,100 shares, which represents about 6.49% of the company's 51.63M share float. The purchases were led by Director John Pope, who paid nearly $200,000 for 6,370 shares on April 14th. No insider sales were made in the past six months, a strong bullish sentiment.
  • Net institutional purchases in the current quarter at 10.0M shares, which represents about 19.37% of the company's float of 51.63M shares. The 2 holders of the stock are Franklin Resources, Inc and MHR Fund Management, LLC.
  • Levered free cash flow at $658.12M vs. enterprise value at $5.73B (implies a LFCF/EV ratio at 11.49%).

NAV has a lower than average projected earnings growth rate over the next 5 years (5.33%). This is significantly below the analyst projections for Tata Motors Ltd. (projected EPS growth over next 5 years at 21.0%) and Spartan Motors Inc. (projected EPS growth over next 5 years at 14.0%).

Despite this, and despite recent bearish negative sentiment analysis (31% of recent headlines for NAV have been negative, versus 15% positive), it may be time for Navistar to shine. In addition to bullish sentiment from insiders and hedge funds, short sellers indicate NAV is expected to outperform in the future. Shares shorted have decreased from 12.76M to 11.87M over the last month, a decrease which represents about 1.72% of the company's float of 51.63M shares. Days to cover ratio at 5.56 days.

The company also recently announced certification from the US EPA for its SCR-based MaxxForce 13 engine, a 13-liter heavy-duty big bore engine with selective catalytic reduction emissions technology. It began shipments on Friday April 26, ahead of schedule. In addition to using new clean engine technology, this engine is 500-lbs lighter and has better fuel efficiency and performance than other 13-liter engines. It also claims to make less noise and vibrations in the cab. A catchy combination for heavy vehicle drivers struggling with gas prices.

* Accounting data sourced from Google Finance. Free cash flow data, insider ownership information, short data sourced from Yahoo! Finance. Institutional data sourced from Fidelity. All other data sourced from Finviz.

Source: Hedge Funds And Insiders Are Buying These 3 Undervalued Stocks