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As the market continues to rise, finding high quality, undervalued stocks is becoming harder and harder.

Using our proprietary tool, we've screened over 5,500 stocks to find 4 undervalued stocks with excellent Return on Equity (ROE).

We define excellent ROE as companies with a 5 year average ROE above 15%. This potentially indicates that management has been performing well and creating value. Each of these stocks is undervalued according to a future free cash flow version of discounted cash flow, using a 15% discount rate.

Stocks are ranked in order of their Vuru Grade, which ranks stocks based on the quality of the company and its valuation. It has consistently outperformed the market over the past 3, 5, and 10 year periods.

We hope you'll use this list as a starting point for your analysis:

Addvantage Technologies Group Inc. (NASDAQ:AEY)

AEY distributes and services a line of electronics and hardware for the cable television (CATV) industry. Specifically, AEY sells and services products that are used to acquire, distribute, receive and protect the communications signals carried on fiber-optic, coaxial cable and wireless distribution systems.

Pros:

  • Potential competitive advantage
  • Consistently profitable
  • Delivered positive free cash flow for the past 10 years
  • Trading a discount to its book value
  • Substantially undervalued
  • Insiders own 50% of the business

Cons:

  • New contract with Cisco (NASDAQ:CSCO) could decrease margins

Valuation:

Growth Price (DCF): $9.59
Stability Price (EPV): $3.67
Current Price: $2.65

AEY is undervalued by 261.43% (GP) and 38.55% (SP).

Vuru Grade: 91.65/100. Find the full report here: Vuru's AEY Report.

2. Versant Corporation (NASDAQ:VSNT)

Versant designs, develops, markets and supports object-oriented database management system products that companies use to solve data management and data integration problems.

Pros:

  • Strong Pricing Power due to business type (software)
  • Very strong Balance Sheet (Lots of Cash)
  • Strong performance over the past 5ish years
  • History of Stock Buybacks
  • Excellent Return on Equity

Cons:

  • Lost money from 2001 to 2005
  • Negative Retained Earnings

Valuation:

Growth Price (DCF): $17.47
Stability Price (EPV): $18.37
Current Price: $12.9.

VSNT is undervalued by 34.59% (GP) and 41.55% (SP).

Vuru Grade: 87.50/100. Find the full report here: Vuru's VSNT Report.

3. Acme United Corporation (NYSEMKT:ACU)

Acme United Corporation is a supplier of cutting, measuring and safety products to the school, home, office, hardware and industrial markets.

Pros:

  • Consistently profitable over the past 10 years
  • Positive free cash flow for 7 of the past 10 years
  • Medium Capital Intensity
  • Strong History of Stock Buybacks
  • Strong Dividend History
  • Excellent Return on Equity

Cons:

  • Competitive Industry

Valuation:

Growth Price (DCF): $13.49
Stability Price (EPV): $14.20
Current Price: $9.40

VSNT is undervalued by 43.56% (GP) and 51.11% (SP).

Vuru Grade: 83.35/100. Find the full report here: Vuru's ACU Report.

Disclosure: One member of the Vuru team is long AEY. He purchased a small position in August 2009.

Source: 3 High Quality, Undervalued Stocks with Excellent Return on Equity