"Strength begets strength. When you have a good kick off to the year, the market in general doesn't see a big selloff," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, in a recent CNBC article. He and other analysts dismiss "sell in May and go away", "June swoon" and other seasonal adages referring to the market. Counting the recent rally in May, the S&P 500 has recorded seven consecutive months of positive returns and the Dow Jones Industrial Average has seen six back-to-back months of gains. And looking at the year to date, both have advanced more than 15 percent.
So if the market may very well continue to rally, where can investors find good value? One of the most important figures investors should keep an eye on is the Price/Earnings to Growth (PEG) ratio. PEG ratios take into account a company's earnings growth while determining value. Combined with other factors, this number can lead investors to potentially undervalued gems in the market.
To create the list below, we screened for stocks with a PEG ratio below 1 and a Price to Free Cash Flow (P/FCF) ratio under 15, common indications of undervaluation based on earnings performance.
PEG = P/E / Annual EPS Growth
P/FCF = Market Capitalization / Free Cash Flow
And for signs of bullish sentiments, we then limited our results to those stocks that experienced significant net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these stocks to outperform in the future.
This left us with four companies on our list.
For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.
Do these stocks look undervalued to you? Use the list below as a starting point for your own analysis.
1. AmTrust Financial Services, Inc. (AFSI): Operates as a multinational specialty property and casualty insurance company in the United States and internationally.
- Market cap at $2.16B, most recent closing price at $32.09
- PEG: 0.76
- P/FCF: 3.72
- Net institutional purchases in the current quarter at 2.2M shares, which represents about 6.33% of the company's float of 34.76M shares. The top holders of the stock are JP Morgan Chase & Company (3.23%) and Mawer Investment Management Ltd (3.20%).
- Levered free cash flow at $330.44M vs. enterprise value at $2.36B (implies a LFCF/EV ratio at 14.%).
AFSI has performed poorly since 5/6/13, especially when compared to industry competitors. The stock returned -2.24% over the last month, much lower than The Travelers Companies, Inc. (TRV) and RLI Corp. (RLI), which returned -1.82% and 3.83% during the same time period. Only Erie Indemnity Company (ERIE) performed worse, returning -4.77%.
AFSI has a higher than average projected earnings growth rate over the next 5 years (13.74%). This is higher than the likes of ERIE (projected EPS growth over next 5 years at 10.00%) RLI (projected EPS growth over next 5 years at 10.00%) and TRV (projected EPS growth over next 5 years at 10.04%).
The company announced this week it has priced an underwritten public offering of 4.6M shares of its 6.75% non-cumulative preferred stock at $115 million in aggregate liquidation preference, or a liquidation preference of $25.00 per share. Any declared dividends, payable on the liquidation preference amount, will yield 6.75% per year. The offering is expected to close on 6/10/2013.
2. PartnerRe Ltd. (PRE): Provides reinsurance services worldwide.
- Market cap at $5.1B, most recent closing price at $88.99
- PEG: 0.63
- P/FCF: 9.89
- Net institutional purchases in the current quarter at 2.6M shares, which represents about 5.21% of the company's float of 49.93M shares. The top holders of the stock are Hellman & Friedman Investors V Cayman, Ltd. (6.74%) and The Vanguard Group, Inc. (5.11%).
- TTM gross margin at 22.61% vs. industry average at 17.13%. TTM operating margin at 22.07% vs. industry average at 14.23%. TTM pretax margin at 21.48% vs. industry average at 12.11%.
PRE has returned -3.18% since 5/6/13, and is bringing in disappointing results along with similar stocks in its industry. The stock is slightly behind companies like Everest Re Group Ltd. (RE) and American International Group, Inc. (AIG), which returned -3.12% and -1.61% during the same time period.
The company has reported strong earnings growth over the last year, with EPS growing by 300.84%, higher than competitors like ACE Limited (ACE) (EPS growth over the last year at 74.71%) but still lower than RE (EPS growth over the last year at 1162.13%).
Short sellers think there's more downside to the stock, especially when comparing short float to industry peers. PRE short float stands at 2.23%, which is equivalent to 1.92 days of average trading volume. As an example, this is much higher than ACE (short float at 0.72%, representing 1.71 days of trading volume), but in line with RenaissanceRe Holdings Ltd. (RNR) (short float at 2.30%, representing 2.11 days of trading volume).
3. Hanmi Financial Corporation (HAFC): Operates as the holding company for Hanmi Bank that provides general business banking products and services in the United States.
- Market cap at $491.22M, most recent closing price at $15.55
- PEG: 0.66
- P/FCF: 5.58
- Net institutional purchases in the current quarter at 2.8M shares, which represents about 9.13% of the company's float of 30.68M shares. The top holders of the stock are Wellington Management Company, LLP (8.11%) and BlackRock Fund Advisors (5.02%).
- TTM gross margin at 86.% vs. industry average at 74.45%. TTM operating margin at 51.65% vs. industry average at 44.96%. TTM pretax margin at 33.94% vs. industry average at 24.36%.
HAFC has returned -0.82% since 5/6/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like Cathay General Bancorp (CATY) and Zions Bancorp. (ZION), which returned 2.85% and 7.72% during the same time period.
The company has reported strong earnings growth over the last year, with EPS growing by 108.07%, higher than competitors like East West Bancorp, Inc. (EWBC) (EPS growth over the last year at 18.08%) and CATY (EPS growth over the last year at 20.46%).
HAFC saw 2013 get off to a strong start, with earnings for the first quarter featuring net income of $10.1M, compared to $7.3M in the same quarter of 2012. The company credited healthy loan production, growing core deposits and improving efficiency and asset quality as factors adding to the increase.
4. Republic Airways Holdings Inc. (RJET): Provides scheduled passenger services via two segments, Republic and Frontier airlines.
- Market cap at $504.67M, most recent closing price at $10.27
- PEG: 0.78
- P/FCF: 2.07
- Net institutional purchases in the current quarter at 5.6M shares, which represents about 13.53% of the company's float of 41.40M shares. The top holders of the stock are Corsair Capital Management, L.L.C. (8.95%) and Dimensional Fund Advisors LP (8.39%).
- Levered free cash flow at $246.70M vs. enterprise value at $2.30B (implies a LFCF/EV ratio at 10.73%).
RJET has returned -10.59% since 5/6/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like SkyWest, Inc. (SKYW) and Hawaiian Holdings Inc. (HA), which returned -2.50% and 6.21%, respectively, but is in line with JetBlue Airways Corp. (JBLU), which returned -10.40% during the same time period.
The company has reported decent earnings growth over the last year, with EPS growing by 132.49%, higher than competitors like JBLU (EPS growth over the last year at 40.74%) but still lower than SKYW (EPS growth over the last year at 288.79%) and HA (EPS growth over the last year at 2034.50%).
RJET subsidiary Frontier Airlines recently announced an expanded seasonal service over Thanksgiving, Christmas and New Year's, as well as extended schedule during which time flights can be booked in advance. Seasonal nonstop services will resume in markets including the Denver hub, Indianapolis and Milwaukee to Cancun, and Madison and Omaha to Orlando.
*LFCF data sourced from Yahoo! Finance, institutional data sourced from Fidelity, all other data sourced from Finviz.