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Below is a list of six stocks that are undervalued relative to their free cash flows, with P/FCF < 10. Yet even with free cash flows greater than 10% of market cap, these companies have seen accounts receivable grow faster than revenues during the most recent quarter--an accounting trend that deserves closer attention.

Whenever accounts receivable take up an increasingly larger portion of revenue, the quality of revenue is considered lower. This is because accounts receivable is an accrual (as opposed to cash), which is subject to management’s discretion.

However such increases in accounts receivable could be due to structural changes in the business, such as a new credit policy or an acquisition. There may be several explanations for these trends, but when accounts receivable growth exceeds revenue growth, you should take a second look, and watch out for potential value traps.

Do you trust the revenue quality of these names? Full details below.

Financial data sourced from Google Finance, all other data sourced from Finviz.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the 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.

List sorted by difference between accounts receivable growth and revenue growth.

1. Endo Pharmaceuticals Holdings Inc. (NASDAQ:ENDP): Drug Manufacturer. Market cap of $4.23B. P/FCF at 9.75. MRQ Revenue grew by 30.60% on a y/y basis, while accounts receivable grew by 63.36%. MRQ accounts receivable, as a percentage of current assets, increased from 26.34% to 40.53% year-over-year. The stock is a short squeeze candidate, with a short float at 5.35% (equivalent to 5.46 days of average volume).

2. RF Micro Devices Inc. (NASDAQ:RFMD): Semiconductor Industry. Market cap of $1.96B. P/FCF at 9.28. MRQ Revenue grew by 11.40% on a y/y basis, while accounts receivable grew by 34.77%. MRQ accounts receivable, as a percentage of current assets, increased from 24.70% to 26.27% year-over-year. Note that this is a risky stock that is significantly more volatile than the overall market (beta = 2.5). The stock has gained 47.1% over the last year.

3. Atlas Air Worldwide Holdings Inc. (NASDAQ:AAWW): Air Services Industry. Market cap of $1.76B. P/FCF at 7.02. MRQ Revenue grew by 11.86% on a y/y basis, while accounts receivable grew by 33.83%. MRQ accounts receivable, as a percentage of current assets, increased from 7.73% to 10.77% year-over-year. The stock has had a good month, gaining 28.72%.

4. TreeHouse Foods Inc. (NYSE:THS): Processed & Packaged Goods Industry. Market cap of $1.83B. P/FCF at 9.99. MRQ Revenue grew by 25.86% on a y/y basis, while accounts receivable grew by 46.30%. MRQ accounts receivable, as a percentage of current assets, increased from 23.35% to 28.73% year-over-year. THS has a relatively low correlation to the market (beta = 0.43), which may be appealing to risk-averse investors. THS has a short float at 12.69% (equivalent to 20.52 days of average volume), which implies it is a short squeeze candidate. The stock has gained 15.88% over the last year.

5. L-3 Communications Holdings Inc. (NYSE:LLL): Aerospace/Defense Products & Services Industry. Market cap of $9.16B. P/FCF at 8.36. MRQ Revenue grew by 1.12% on a y/y basis, while accounts receivable grew by 13.05%. MRQ accounts receivable, as a percentage of current assets, increased from 22.04% to 25.58% year-over-year. The stock has lost 13.14% over the last year.

6. Lexmark International Inc. (NYSE:LXK): Computer Based Systems Industry. Market cap of $2.86B. P/FCF at 7.97. MRQ Revenue grew by 2.87% on a y/y basis, while accounts receivable grew by 12.87%. MRQ accounts receivable, as a percentage of current assets, increased from 19.85% to 21.13% year-over-year. The stock is a short squeeze candidate, with a short float at 8.19% (equivalent to 5.22 days of average volume). The stock has also gained 5.63% over the last year.

Source: Value Traps? 6 Undervalued Stocks Raising Accounts Receivable Flags