16 Undervalued Stocks With Strong Sources of Profitability

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Includes: AES, ALK, ASCA, BKI, CACI, CPHD, GPK, ICFI, KEM, KS, MTZ, PRAA, SFD, SHS, SPTN, TRW
by: Kapitall

If you find return on equity to be one of the most important metrics in investing, then this may be an interesting starting point for your own analysis.

To construct this list be looked for stocks with the following characteristics:

  • Market cap above $300M
  • Price to cash flow below 10 (i.e. undervalued relative to cash flow)
  • Rising return on equity for the recent quarter, on a year-over-year basis

We then focused on those candidates that experienced positive sources of profitability (by comparing the most recent quarter's results to last year's comparable quarter):

  • Improving profit margin, i.e. higher Net Income/ Revenues
  • Improving asset turnover, i.e. higher Sales/Assets
  • And decreasing leverage ratio, i.e. lower Assets/Equity

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.

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

Considering this information, which of these stocks are you most bullish about? (Note: All comparisons based on most recent quarter vs. last year's comparable quarter)

1. Ameristar Casinos Inc. (NASDAQ:ASCA): Resorts & Casinos Industry. Market cap of $644.40M. P/FCF at 4.31. MRQ net profit margin 7.08% vs. PQ net profit margin at 3.53%. MRQ sales/assets ratio 0.15 vs. PQ sales/assets ratio 0.14. MRQ assets/equity ratio 5.45 vs. PQ assets/equity ratio 6.22. The stock has performed poorly over the last month, losing 12.47%.

2. KEMET Corp. (NYSE:KEM): Diversified Electronics Industry. Market cap of $374.93M. P/FCF at 4.75. MRQ net profit margin 8.06% vs. PQ net profit margin at 0.15%. MRQ sales/assets ratio 0.3 vs. PQ sales/assets ratio 0.29. MRQ assets/equity ratio 2.46 vs. PQ assets/equity ratio 2.61. The stock has gained 130.67% over the last year.

3. Alaska Air Group, Inc. (NYSE:ALK): Regional Airlines Industry. Market cap of $2.21B. P/FCF at 4.9. MRQ net profit margin 7.69% vs. PQ net profit margin at 0.64%. MRQ sales/assets ratio 0.19 vs. PQ sales/assets ratio 0.17. MRQ assets/equity ratio 4.37 vs. PQ assets/equity ratio 5.66. The stock has performed poorly over the last month, losing 11.2%.

4. Buckeye Technologies Inc. (NYSE:BKI): Paper & Paper Products Industry. Market cap of $947.39M. P/FCF at 7.24. MRQ net profit margin 12.07% vs. PQ net profit margin at 10.14%. MRQ sales/assets ratio 0.27 vs. PQ sales/assets ratio 0.22. MRQ assets/equity ratio 1.53 vs. PQ assets/equity ratio 1.99. This is a risky stock that is significantly more volatile than the overall market (beta = 2.57). The stock has performed poorly over the last month, losing 11.48%.

5. MasTec, Inc. (NYSE:MTZ): Heavy Construction Industry. Market cap of $1.42B. P/FCF at 7.28. MRQ net profit margin 3.41% vs. PQ net profit margin at 1.65%. MRQ sales/assets ratio 0.37 vs. PQ sales/assets ratio 0.34. MRQ assets/equity ratio 2.4 vs. PQ assets/equity ratio 2.44. The stock is a short squeeze candidate, with a short float at 8.47% (equivalent to 5.02 days of average volume). The stock has performed poorly over the last month, losing 16.47%.

6. Graphic Packaging Holding Company (NYSE:GPK): Packaging & Containers Industry. Market cap of $1.77B. P/FCF at 7.75. MRQ net profit margin 2.67% vs. PQ net profit margin at 0.63%. MRQ sales/assets ratio 0.22 vs. PQ sales/assets ratio 0.21. MRQ assets/equity ratio 5.71 vs. PQ assets/equity ratio 6.41. This is a risky stock that is significantly more volatile than the overall market (beta = 2.11). The stock has performed poorly over the last month, losing 10.3%.

7. KapStone Paper and Packaging Corporation (NYSE:KS): Paper & Paper Products Industry. Market cap of $697.61M. P/FCF at 7.77. MRQ net profit margin 7.32% vs. PQ net profit margin at 3.62%. MRQ sales/assets ratio 0.28 vs. PQ sales/assets ratio 0.26. MRQ assets/equity ratio 1.67 vs. PQ assets/equity ratio 1.9. The stock has gained 34.13% over the last year.

8. Sauer-Danfoss Inc. (NYSE:SHS): Diversified Machinery Industry. Market cap of $2.10B. P/FCF at 8.0. MRQ net profit margin 12.49% vs. PQ net profit margin at 5.36%. MRQ sales/assets ratio 0.46 vs. PQ sales/assets ratio 0.35. MRQ assets/equity ratio 3.17 vs. PQ assets/equity ratio 9.43. This is a risky stock that is significantly more volatile than the overall market (beta = 2.1). The stock has performed poorly over the last month, losing 24.16%.

9. Spartan Stores Inc. (NASDAQ:SPTN): Food Wholesale Industry. Market cap of $401.47M. P/FCF at 8.1. MRQ net profit margin 1.36% vs. PQ net profit margin at 0.58%. MRQ sales/assets ratio 0.76 vs. PQ sales/assets ratio 0.74. MRQ assets/equity ratio 2.46 vs. PQ assets/equity ratio 2.75. The stock is a short squeeze candidate, with a short float at 6.72% (equivalent to 14.56 days of average volume). The stock has had a good month, gaining 12.82%.

10. TRW Automotive Holdings Corp. (NYSE:TRW): Auto Parts Industry. Market cap of $6.46B. P/FCF at 8.11. MRQ net profit margin 6.84% vs. PQ net profit margin at 5.69%. MRQ sales/assets ratio 0.41 vs. PQ sales/assets ratio 0.4. MRQ assets/equity ratio 4.18 vs. PQ assets/equity ratio 6.47. This is a risky stock that is significantly more volatile than the overall market (beta = 3.38). The stock has gained 68.82% over the last year.

11. CACI International Inc. (NYSE:CACI): Technical Services Industry. Market cap of $1.81B. P/FCF at 8.14. MRQ net profit margin 3.99% vs. PQ net profit margin at 3.41%. MRQ sales/assets ratio 0.4 vs. PQ sales/assets ratio 0.36. MRQ assets/equity ratio 1.8 vs. PQ assets/equity ratio 1.92. The stock is a short squeeze candidate, with a short float at 10.75% (equivalent to 14.4 days of average volume). The stock has gained 31.74% over the last year.

12. ICF International Inc. (NASDAQ:ICFI): Management Services Industry. Market cap of $477.15M. P/FCF at 8.19. MRQ net profit margin 3.97% vs. PQ net profit margin at 3.11%. MRQ sales/assets ratio 0.34 vs. PQ sales/assets ratio 0.3. MRQ assets/equity ratio 1.59 vs. PQ assets/equity ratio 1.77. The stock has gained 5.84% over the last year.

13. Portfolio Recovery Associates Inc. (NASDAQ:PRAA): Business Services Industry. Market cap of $1.34B. P/FCF at 8.98. MRQ net profit margin 20.68% vs. PQ net profit margin at 17.75%. MRQ sales/assets ratio 0.11 vs. PQ sales/assets ratio 0.09. MRQ assets/equity ratio 1.98 vs. PQ assets/equity ratio 2.09. The stock is a short squeeze candidate, with a short float at 19.89% (equivalent to 43.47 days of average volume). It's been a rough couple of days for the stock, losing 5.1% over the last week.

14. Smithfield Foods Inc. (NYSE:SFD): Meat Products Industry. Market cap of $3.16B. P/FCF at 9.08. MRQ net profit margin 6.36% vs. PQ net profit margin at 1.29%. MRQ sales/assets ratio 0.41 vs. PQ sales/assets ratio 0.37. MRQ assets/equity ratio 2.37 vs. PQ assets/equity ratio 2.66. Might be undervalued at current levels, with a PEG ratio at 0.85, and P/FCF ratio at 9.08. It's been a rough couple of days for the stock, losing 5.84% over the last week.

15. The AES Corporation (NYSE:AES): Electric Utilities Industry. Market cap of $9.63B. P/FCF at 9.16. MRQ net profit margin 5.25% vs. PQ net profit margin at 4.77%. MRQ sales/assets ratio 0.11 vs. PQ sales/assets ratio 0.09. MRQ assets/equity ratio 5.96 vs. PQ assets/equity ratio 6.7. The stock has gained 18.59% over the last year.

16. Cephalon Inc. (NASDAQ:CEPH): Biotechnology Industry. Market cap of $6.07B. P/FCF at 9.55. MRQ net profit margin 28.33% vs. PQ net profit margin at 18.53%. MRQ sales/assets ratio 0.14 vs. PQ sales/assets ratio 0.12. MRQ assets/equity ratio 1.81 vs. PQ assets/equity ratio 2.01. The stock has gained 38.98% over the last year.

*Data sourced from Google Finance and Finviz.

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