Here we present four stocks undervalued relative to earnings growth, with PEG < 1. These stocks have also seen higher growth in quarterly operating cash flow year-over-year relative to growth in net income.
Net income is comprised of both accruals (i.e. management estimates) and cash flows. Studies have shown that earnings with higher cash flow proportions have a higher persistence. Therefore, in this article, our measure of cash flows outpacing net income implies that cash flow is becoming a larger proportion of earnings, improving earnings quality.
Do you think these companies have attractive earnings? Use this list as a starting-off point for your own analysis.
List sorted by difference between growth in net income and operating cash flow.
1. Gentiva Health Services Inc. (NASDAQ:GTIV): Home Health Care Industry. Market cap of $745.23M. PEG at 0.8. Net Income grew by 30.46% ($13.5M vs. $10.3M y/y), while Operating Cash Flow grew by 260.79% ($39.9M vs. $11.1M y/y) (comparing 13 weeks ending 2011-03-31 vs. 13 weeks ending 2010-04-04). The stock is a short squeeze candidate, with a short float at 5.06% (equivalent to 8.83 days of average volume). The stock has performed poorly over the last month, losing 13.61%.
2. Ford Motor Co. (NYSE:F): Auto Manufacturers Industry. Market cap of $55.30B. PEG at 0.94. Net Income grew by 22.35% ($2.6B vs. $2.1B y/y), while Operating Cash Flow grew by 35.47% ($2.2B vs. $1.6B y/y) (comparing 3 months ending 2011-03-31 vs. 3 months ending 2010-03-31). The stock has gained 21.43% over the last year.
3. Lincoln National Corp. (NYSE:LNC): Life Insurance Industry. Market cap of $9.02B. PEG at 0.87. Net Income grew by 19.62% ($339.0M vs. $283.4M y/y), while Operating Cash Flow grew by 32.68% ($339.0M vs. $255.5M y/y) (comparing 3 months ending 2011-03-31 vs. 3 months ending 2010-03-31). This is a risky stock that is significantly more volatile than the overall market (beta = 2.55). The stock has gained 5.35% over the last year.
4. Jefferies Group Inc. (JEF): Investment Brokerage Industry. Market cap of $4.27B. PEG at 0.72. Net Income grew by 21.07% ($87.3M vs. $72.1M y/y), while Operating Cash Flow grew by 34.12% ($102.1M vs. $76.1M y/y) (comparing 3 months ending 2011-02-28 vs. 3 months ending 2010-03-31). The stock is a short squeeze candidate, with a short float at 5.97% (equivalent to 9.86 days of average volume). It's been a rough couple of days for the stock, losing 6.77% over the last week.
*Accounting data sourced from Google Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.