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Summary

  • If a company's P/E ratio is equal to a constant k, an increase in a stock's EPS estimate should be matched by a proportional increase in share price.
  • When the increase in EPS is greater than the increase in price, the stock may be undervalued.
  • Aspen Technology, Gorman-Rupp Co., and Synaptics Inc. bear closer scrutiny on these grounds.

The stock market runs on sentiment. From bulls driving up prices to bears bringing them down, investor sentiment helps dictate market activity.

Many factors can shape investors' feelings towards a particular stock, industry, or sector. As Barron's pointed out in March, the biotech selloff had at least five wildly different causes, including claims of overvaluation made by the president of the New York Fed and the potential for increased competition from generics.

Other times, investors and analysts rely on fundamentals - assets, debt, earnings, revenue, etc.- when evaluating investments. We decided to follow analyst sentiment and take a closer look at average full-year earnings per share (EPS) estimates in our following screen.

We began with a group of undervalued stocks as indicated by an EPS/price mismatch. Operating under the assumption that a company's price-to-earnings (P/E) ratio is equal to a constant k, an increase in a stock's EPS estimate should be matched by a proportional increase in its share price. When the increase in EPS is greater than the increase in price, it may be an instance of mispricing and the stock may be undervalued.

For our screen, we used the latest average analyst estimate for full-year EPS and compared it to the estimate from 30 days earlier. Likewise, we compared changes in stock price over the last 30 days.

Since we began with a focus on EPS, we decided to continue the trend with the next metric. We narrowed down our group to stocks with return on assets (ROA) higher than the industry average. ROA is a measurement of a company's ability to use its assets - debt and equity - to generate earnings. A high ROA is a testament to a company's aptitude for making investments that it can convert into profit. To calculate ROA, divide net income by total assets.

1. Aspen Technology, Inc. (AZPN, Kapitall snapshot): Provides integrated process optimization software solutions for manufacturers in process industries, and engineering and construction firms. Market cap at $4.17B, most recent closing price at $44.46.

The EPS estimate for the company's current year increased from 0.83 to 0.95 over the last 30 days, an increase of 14.46%. This increase came during a time when the stock price changed by 5.48% (from 42.33 to 44.65 over the last 30 days). TTM Return on Assets at 18.82% vs. an industry average at 7.31%.

2. Gorman-Rupp Co. (GRC, Kapitall snapshot): Designs, manufactures, and sells pumps and related fluid control products worldwide. Market cap at $803.51M, most recent closing price at $30.10.

The EPS estimate for the company's current year increased from 1.44 to 1.55 over the last 30 days, an increase of 7.64%. This increase came during a time when the stock price changed by -2.54% (from 31.83 to 31.02 over the last 30 days). TTM Return on Assets at 8.74% vs. an industry average at 3.45%.

3. Synaptics Inc. (SYNA, Kapitall snapshot): Develops and supplies custom-designed human interface solutions that enable people to interact with various mobile computing, communications, entertainment, and other electronic devices. Market cap at $2.14B, most recent closing price at $58.10.

The EPS estimate for the company's current year increased from 3.68 to 4.06 over the last 30 days, an increase of 10.33%. This increase came during a time when the stock price changed by -2.41% (from 62.62 to 61.11 over the last 30 days). TTM Return on Assets at 19.15% vs. an industry average at 8.62%.

Source: Analysts Raised EPS Estimates On These 3 Undervalued Profitable Stocks