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One way to search for potentially undervalued stocks is by finding those that do not proportionately increase in price for a given increase in analyst EPS estimate.

We created a list of stocks with this in mind by starting with a theoretical observation about P/E ratios. If the Price / Earnings Per Share ratio is equal to some constant k, it follows that there should be a linear relationship between Price and Earnings per Share. In other words:

If P/E = K

then P = (K)(E)

If there is a mismatch between growth rates in projected earnings per share values and price, a mis-pricing may have occurred, presenting an opportunity to value investors.

All of the stocks mentioned are small-cap stocks that have seen an increase in the current year EPS analyst projection over the last 30 days. For every stock in this list, the price change has lagged the change in EPS projections (most actually decreasing), which indicates that these stocks may still have to price in the good news.

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,

Yes, this approach isn't 100% accurate. There is no reason to believe that P/E should be equal to a constant at all times (that is, after all, a simplifying assumption to build a screen). But the goal here is to give you a starting point in finding potentially undervalued stocks.

Do you think these stocks should be priced higher? Use this list as a starting-off point for your own analysis.

List sorted by difference between change in EPS and change in price.

1. China New Borun Corporation (NYSE:BORN): Beverages Industry. Market cap of $110.64M. Over the last 30 days, the current year EPS consensus has increased by 1.44% (from $2.09 to $2.12), while price decreased by 43.25% (from $7.19 to $4.08). The stock is currently stuck in a downtrend, trading 26.68% below its SMA20, 47.54% below its SMA50, and 62.77% below its SMA200. The stock has performed poorly over the last month, losing 53.41%.

(Click charts to expand)

2. SinoCoking and Coke Chemical Industries, Inc. (NASDAQ:SCOK): Nonmetallic Mineral Mining Industry. Market cap of $102.50M. Over the last 30 days, the current year EPS consensus has increased by 4.35% (from $0.69 to $0.72), while price decreased by 19.06% (from $6.14 to $4.97). The stock is currently stuck in a downtrend, trading 7.86% below its SMA20, 17.22% below its SMA50, and 44.36% below its SMA200. The stock has performed poorly over the last month, losing 22.61%.

3. Cambrex Corporation. (NYSE:CBM): Biotechnology Industry. Market cap of $119.74M. Over the last 30 days, the current year EPS consensus has increased by 5.13% (from $0.39 to $0.41), while price decreased by 13.83% (from $4.70 to $4.05). The stock is currently stuck in a downtrend, trading 9.38% below its SMA20, 14.86% below its SMA50, and 15.98% below its SMA200. The stock has performed poorly over the last month, losing 18.44%.

4. PCTEL, Inc. (NASDAQ:PCTI): Diversified Communication Services Industry. Market cap of $106.36M. Over the last 30 days, the current year EPS consensus has increased by 4.17% (from $0.24 to $0.25), while price decreased by 10.66% (from $6.38 to $5.70). The stock is currently stuck in a downtrend, trading 11.35% below its SMA20, 17.63% below its SMA50, and 14.37% below its SMA200. It's been a rough couple of days for the stock, losing 10.31% over the last week.

5. Datalink Corp. (NASDAQ:DTLK): Business Software & Services Industry. Market cap of $106.75M. Over the last 30 days, the current year EPS consensus has increased by 3.64% (from $0.55 to $0.57), while price decreased by 9.72% (from $6.79 to $6.13). After a solid performance over the last year, DTLK has pulled back during recent sessions. The stock is 5.06% below its SMA20 and 10.57% below its SMA50, but remains 12.68% above its SMA200.

6. Allied Healthcare International Inc. (NASDAQ:AHCI): Home Health Care Industry. Market cap of $105.0M. Over the last 30 days, the current year EPS consensus has increased by 5.88% (from $0.17 to $0.18), while price decreased by 6.92% (from $2.60 to $2.42). The stock has had a couple of great days, gaining 6.17% over the last week. The stock has performed poorly over the last month, losing 10.07%.

7. Eastern Insurance Holdings, Inc. (NASDAQ:EIHI): Accident & Health Insurance Industry. Market cap of $113.74M. Over the last 30 days, the current year EPS consensus has increased by 9.09% (from $0.55 to $0.60), while price changed by 0% (from $13.16 to $13.16). The stock has gained 27.88% over the last year.

8. Kaiser Federal Financial Group, Inc. (KFFG): Savings & Loans Industry. Market cap of $115.77M. Over the last 30 days, the current year EPS consensus has increased by 8.75% (from $0.80 to $0.87), while price increased by 0.92% (from $11.99 to $12.10). The stock is a short squeeze candidate, with a short float at 40.5% (equivalent to 8.29 days of average volume). The stock has gained 35.31% over the last year.

*EPS and price data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: 8 Small-Cap Stocks Underpriced From EPS Estimates