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This list might offer an interesting starting point to a value-oriented investor.

Here is a list of undervalued stocks, with Price to Free Cash Flow (P/FCF) ratios below 5. In other words, free cash flows make up more than 20% of each company's market capitalization. In addition, all of these stocks have a large number of open call option positions relative to put option positions, i.e. a low Put/Call ratio.

Judging by the large number of open call option positions relative to put options, it's clear that the options market thinks these names are set to rally--do you agree? Full details below.

Options data sourced from Schaeffer's, short float, performance data, and P/FCF data sourced from Finviz.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.


The list has been sorted by Put/Call ratio.

1. Nippon Telegraph & Telephone Corp. (NTT):
Telecom Services Industry. Market cap of $63.57B.

P/FCF at 3.75. Call open interest at 983 contracts vs. put open interest at 10 contracts (Put/Call ratio at 0.01). Short float at 0.1%, which implies a short ratio of 3.32. The stock has gained 8.79% over the last year.

Other Highlights:

- The company has low debt and great liquidity, which significantly reduces its risk over the coming months. During the most recent quarter, the total Debt/Assets ratio stood at 24.51% vs. the industry average at 31.57%. Total Debt/Equity came in at 59.00%, lower than the industry average at 91.24%. The company also appears to be more liquid than its competitors. The TTM Current Ratio stands at 1.25, higher than the industry average at 0.85. (Note: All ratios based on the most recent quarter, annualized)

2. Quanex Building Products Corporation (NX): General Building Materials Industry. Market cap of $735.18M.

P/FCF at 4.55. Call open interest at 851 contracts vs. put open interest at 37 contracts (Put/Call ratio at 0.04). Short float at 3.29%, which implies a short ratio of 3.63. The stock has gained 26.75% over the last year.

Other Highlights:

- The company seems to be doing a good job managing its inventory and receivables, which provides more evidence of a solid management team. Trailing twelve month Inventory Turnover ratio came in at 13.29, higher than the industry average at 6.74, while trailing twelve month receivables turnover came in at 10.02 vs. the industry average at 7.66.

- Institutional and mutual fund investors have been net purchasers of the company's shares over the last two quarters, suggesting that the smart money thinks there's more upside to the stock. Institutional investors have been net buyers of 599.5K shares during the most recent quarter, vs. 2.3M net shares purchased in the previous quarter. Mutual fund investors have also been optimistic on the stock. They were net buyers of 574.6K shares during the most recent quarter, vs. 1.1M net shares purchased in the previous quarter.

3. PharMerica Corporation (PMC): Drug Stores Industry. Market cap of $377.22M.

P/FCF at 4.96. Call open interest at 2,063 contracts vs. put open interest at 147 contracts (Put/Call ratio at 0.07). Short float at 7.94%, which implies a short ratio of 8.53. The stock has lost -22.24% over the last year.

Other Highlights:


- The company's capital spending accelerated by 28.03% over the last five years, much faster than the industry average of 0.09%. At least theoretically, this makes them more competitive over the coming years, since their operational assets are more up-to-date.

- The company has demonstrated rapid cash flow growth over the last five years, which may lower their risk going forward. Five year average cash flow growth at 62.42%, much higher than the industry average at 9.95%.

4. CNO Financial Group, Inc. (CNO): Accident & Health Insurance Industry. Market cap of $1.64B.

P/FCF at 2.19. Call open interest at 21,178 contracts vs. put open interest at 1,637 contracts (Put/Call ratio at 0.08). Short float at 7.7%, which implies a short ratio of 11.39. The stock has gained 48.41% over the last year.

Other Highlights:


- The company appears to be undervalued relative to book value. Price/Book ratio at 0.41, much lower than the industry average of 1.34.

- Insiders appear to be optimistic on the outlook for the company. On a net basis, they've purchased an average of 143,000 shares per year (over last 2 years).

5. Aspen Insurance Holdings Ltd. (AHL):
Property & Casualty Insurance Industry. Market cap of $2.31B.

P/FCF at 4.02. Call open interest at 1,652 contracts vs. put open interest at 157 contracts (Put/Call ratio at 0.1). Short float at 7.4%, which implies a short ratio of 5.5. The stock has gained 15.29% over the last year.

Other Highlights:

- The company appears to be undervalued relative to book value. Price/Book ratio at 0.71, much lower than the industry average of 1.34.

- The company outperformed analyst earnings estimates during the most recent quarter, suggesting that the analyst community is underestimating the stock. The company reported earnings per share of $1.02 per share, and exceeded the First Call Consensus of $0.71 (Q4 Earnings on 02/07/11). The company also outperformed analyst estimates over the last year, reporting earnings per share at $3.03, beating the consensus view at $2.74 (based on the estimates of 9 analysts).

6. Horace Mann Educators Corp. (HMN):
Property & Casualty Insurance Industry. Market cap of $701.92M.

P/FCF at 4.38. Call open interest at 218 contracts vs. put open interest at 22 contracts (Put/Call ratio at 0.1). Short float at 2.01%, which implies a short ratio of 4.02. The stock has gained 45.18% over the last year.

Other Highlights:

- The company appears to be undervalued relative to book value. Price/Book ratio at 0.8, much lower than the industry average of 1.34.

7. Montpelier Re Holdings Ltd. (MRH): Property & Casualty Insurance Industry. Market cap of $1.37B.

P/FCF at 4.51. Call open interest at 555 contracts vs. put open interest at 70 contracts (Put/Call ratio at 0.13). Short float at 4.78%, which implies a short ratio of 6.72. The stock has gained 27.58% over the last year.

Other Highlights:

- When comparing the company's price relative to earnings, it's clearly undervalued. The P/E ratio, based on the most recent quarter's earnings, stands at 4.03, lower than the industry average at 11.9, while the P/E ratio, based on trailing twelve month earnings, stands at 5.68, which is lower than the industry average at 11.46. The company also appears to be undervalued relative to projected earnings growth. PEG ratio at 0.47, vs. an industry average at 1.69.

- The company appears to have a very efficient workforce, which should help manage cost pressures going forward. Trailing twelve month Income/Employee stands at $1,313,397, higher than the industry average at $157,026. The company also outperformed on the Revenue/Employee metric ($3,690,910 vs. the industry average at $1,357,870).

- Insiders appear to be optimistic on the outlook for the company. On a net basis, they've purchased an average of 16,054 shares per year (over last 2 years).

8. Quiksilver Inc. (ZQK): Apparel Clothing Industry. Market cap of $754.73M.

P/FCF at 4.71. Call open interest at 4,423 contracts vs. put open interest at 934 contracts (Put/Call ratio at 0.21). Short float at 3.13%, which implies a short ratio of 3.43. The stock has gained 128.36% over the last year.

Other Highlights:

-Institutional and mutual fund investors have been net purchasers of the company's shares over the last two quarters, suggesting that the smart money thinks there's more upside to the stock. Institutional investors have been net buyers of 2.7M shares during the most recent quarter, vs. 1.9M net shares purchased in the previous quarter. Mutual fund investors have also been optimistic on the stock. They were net buyers of 948.1K shares during the most recent quarter, vs. 1.0M net shares purchased in the previous quarter.

9. Mitsubishi UFJ Financial Group, Inc. (MTU): Money Center Banks Industry. Market cap of $78.11B.

P/FCF at 4.08. Call open interest at 3,931 contracts vs. put open interest at 842 contracts (Put/Call ratio at 0.21). Short float at 0.02%, which implies a short ratio of 0.76. The stock has gained 8.02% over the last year.

Other Highlights:

- When comparing the company's price relative to earnings, it's clearly undervalued. The P/E ratio, based on the most recent quarter's earnings, stands at 7.67, lower than the industry average at 14.55, while the P/E ratio, based on trailing twelve month earnings, stands at 9.2, which is lower than the industry average at 11.08. The also company appears to be undervalued relative to book value. Price/Book ratio at 0.74, much lower than the industry average of 1.52.

- The company appears to have a very efficient workforce, which should help manage cost pressures going forward. Trailing twelve month Income/Employee stands at $105,413, higher than the industry average at $59,190. The company also outperformed on the Revenue/Employee metric ($704,100 vs. the industry average at $472,520).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 9 Undervalued Stocks With Bullish Options Sentiment