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Summary

  • Corporate mergers announced this week may signal another leg of the bull market.
  • We screened for companies that have strong analyst recommendations and good levered free cash flow to enterprise value ratios to find companies that would follow the trend.
  • We found 4 stocks in various sectors that may be undervalued.

A number of big mergers offset other market concerns on Monday, as stocks hovered at modest gains as of 3:30 PM New York Time.

Zillow (NASDAQ:Z) bought Trulia (TRLA), in a bid to create the world's largest online real estate broker. In the retail sector, Dollar General (NYSE:DG) agreed to buy Family Dollar (NYSE:FDO)-helping 2014's total merger activity top $1 trillion.

That's already more than all of 2013.

For optimists who think the stock market has room to advance, we ran a screen on stocks that have the best chance of continuing their strong performance thus far. To do that we first looked at analyst ratings.

Click here for the full, interactive chart.

First we set our screen to only include stocks below $5 dollars-and then limited that screen to stocks with a rating of "strong buy." We used Reuter's method to compile the average scores, which uses a 5-point scale between "strong buy" (1) and "strong sell" (5) to assess an average recommendation.

The lower the rating, the better. Stocks with an average rating below 2 are considered "strong buys." We then narrowed that list further to only include stocks that might be undervalued, using the levered-free-cash-flow to enterprise-value ratio. This means the stock has a lot of cash on hand relative to other companies of its size. The ratio varies sector by sector, but a ratio above 10% is commonly held to be good for all sectors. The following four stocks made the cut.

Click here for the full, interactive chart.

1. PAR Technology Corp. (NYSE:PAR): Provides professional services and enterprise business management technology to the hospitality industry worldwide. Market cap at $61.58M, most recent closing price at $3.94.

Levered free cash flow at $5.42M vs. enterprise value at $51.80M (implies a LFCF/EV ratio at 10.46%).

Analyst recommendation: 1.0

2. RadiSys Corporation (NASDAQ:RSYS): Develops, produces, and markets application-ready software and hardware platforms for Internet protocol (NYSE:IP)-based wireless, wireline, and video networks markets. Market cap at $117.49M, most recent closing price at $3.26.

Levered free cash flow at $11.15M vs. enterprise value at $108.28M (implies a LFCF/EV ratio at 10.3%).

Analyst recommendation: 1.5

Click here for the full, interactive chart.

3. TGC Industries Inc. (NASDAQ:TGE): Provides geophysical services in the United States and Canada. Market cap at $102.11M, most recent closing price at $4.65.

Levered free cash flow at $20.21M vs. enterprise value at $101.16M (implies a LFCF/EV ratio at 19.98%).

Analyst recommendation: 1.0

4. Ultralife Corp. (NASDAQ:ULBI): Ultralife Corporation offers products and services ranging from portable and standby power solutions to communications and electronics systems. Market cap at $63.25M, most recent closing price at $3.61.

Levered free cash flow at $9.93M vs. enterprise value at $44.37M (implies a LFCF/EV ratio at 22.38%).

Analyst recommendation: 1.0

Disclosure: The author has 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 Rebecca Lipman, 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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: 4 Undervalued Stocks Under $5 With Ratings Of 'Strong Buy'