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%.
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%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.