Profitable Ideas: 6 Undervalued Stocks Beating Industry Profit Averages

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Includes: AAWW, BPI, GCI, GLDD, UFS, USNA
by: Kapitall

If you like to invest in companies that tend to outperform its industry profit averages, this article may provide you with a great starting point for your own analysis.

To construct this list we looked for stocks with market caps above $300M and a price to free cash flow ratio below 7, i.e. a sign of potential undervalued state. We then looked at each of these names and compared them against the industry with regard to the following profitability ratios:

  • Trailing twelve month (TTM) Gross margin
  • TTM Operating margin
  • TTM Pretax margin

Finally, we only included those companies that beat the industry in all of the metrics above.

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.



Given this information, which of these large caps would you be more likely to put your money to work with?

1. Domtar Corporation (NYSE:UFS): Paper and Paper Products Industry. Market cap of $3.92B. P/FCF at 3.79. TTM Gross margin at 26.13% vs. industry average at 24.44%. TTM Operating margin at 13.58% vs. industry average at 9.19%. TTM Pretax margin at 9.53% vs. industry average at 8.54%. After a solid performance over the last year, UFS has pulled back during recent sessions. The stock is -5.04% below its SMA20 and -3.15% below its SMA50, but remains 11.81% above its SMA200. The stock has performed poorly over the last month, losing 10.9%.

2. Gannett Co., Inc. (NYSE:GCI): Newspapers Industry. Market cap of $3.31B. P/FCF at 5.57. TTM Gross margin at 45.24% vs. industry average at 43.47%. TTM Operating margin at 19.36% vs. industry average at 17.01%. TTM Pretax margin at 15.01% vs. industry average at 13.04%. The stock is a short squeeze candidate, with a short float at 11.67% (equivalent to 8.18 days of average volume). The stock has lost 16.0% over the last year.

3. Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD): Heavy Construction Industry. Market cap of $313.46M. P/FCF at 5.77. TTM Gross margin at 22.68% vs. industry average at 12.09%. TTM Operating margin at 9.49% vs. industry average at 5.22%. TTM Pretax margin at 6.28% vs. industry average at 4.33%. The stock is a short squeeze candidate, with a short float at 5.45% (equivalent to 6.64 days of average volume). The stock is currently stuck in a downtrend, trading -6.99% below its SMA20, -17.94% below its SMA50, and -23.48% below its SMA200. The stock has performed poorly over the last month, losing 16.19%.

4. Bridgepoint Education, Inc. (NYSE:BPI): Education and Training Services Industry. Market cap of $1.22B. P/FCF at 6.46. TTM Gross margin at 75.31% vs. industry average at 53.03%. TTM Operating margin at 32.09% vs. industry average at 21.98%. TTM Pretax margin at 32.32% vs. industry average at 18.3%. The stock is a short squeeze candidate, with a short float at 16.23% (equivalent to 14.84 days of average volume). The stock has gained 11.95% over the last year.

5. Atlas Air Worldwide Holdings Inc. (NASDAQ:AAWW): Air Services, Other Industry. Market cap of $1.48B. P/FCF at 6.55. TTM Gross margin at 25.16% vs. industry average at 17.89%. TTM Operating margin at 15.76% vs. industry average at 9.79%. TTM Pretax margin at 14.62% vs. industry average at 9.45%. This is a risky stock that is significantly more volatile than the overall market (beta = 2.4). The stock has performed poorly over the last month, losing 12.45%.

6. USANA Health Sciences Inc. (NYSE:USNA)
: Drug Related Products Industry. Market cap of $435.64M. P/FCF at 6.78. TTM Gross margin at 81.9% vs. industry average at 69.16%. TTM Operating margin at 13.46% vs. industry average at 12.02%. TTM Pretax margin at 13.16% vs. industry average at 8.12%. The stock is a short squeeze candidate, with a short float at 15.39% (equivalent to 9.33 days of average volume). The stock has lost 22.95% over the last year.

*Data sourced from Fidelity and Finviz.

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