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

To create this list, we started 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.

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.


Although there is no reason to expect that P/E remains constant, this is merely a theoretical assumption for the purpose of giving you a starting point for your own analysis.

We screened tech stocks undervalued by earnings growth (with PEG below 1) for those that exhibit this behavior in P/E trends. The screen produced 5 stocks, listed below.

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.

(Click chart to expand)

Do you think these stocks are being undervalued by the market? Use this list as a starting-off point for your own analysis.

List sorted by difference between projected EPS and price.

1. Multiband Corporation (NASDAQ:MBND): Telecom Services Industry. Market cap of $65.24M. PEG at 0.26. Over the last 30 days, analyst projected EPS has increased 17.86% (from $0.28 to $0.33), while the price has changed 5.79% (from $3.11 to $3.29). The stock has gained 135.71% over the last year.

2. ASM International NV (NASDAQ:ASMI): Semiconductor Equipment & Materials Industry. Market cap of $2.18B. PEG at 0.49. Over the last 30 days, analyst projected EPS has increased 8.99% (from $4.34 to $4.73), while the price has changed -0.89% (from $40.50 to $40.14). This is a risky stock that is significantly more volatile than the overall market (beta = 2.36). The stock has had a couple of great days, gaining 8.31% over the last week.

3. Dynamics Research Corp. (NASDAQ:DRCO): Business Software & Services Industry. Market cap of $140.89M. PEG at 0.99. Over the last 30 days, analyst projected EPS has increased 1.57% (from $1.27 to $1.29), while the price has changed -7.74% (from $15.38 to $14.19). The stock has had a couple of great days, gaining 11.6% over the last week.

4. O2Micro International Ltd. (NASDAQ:OIIM): Semiconductor Circuits Industry. Market cap of $211.05M. PEG at 0.76. Over the last 30 days, analyst projected EPS has increased 2.0% (from $0.50 to $0.51), while the price has changed -5.26% (from $6.65 to $6.30). The stock has gained 4.83% over the last year.

5. Alliance Fiber Optic Products Inc. (NASDAQ:AFOP): Communication Equipment Industry. Market cap of $77.88M. PEG at 0.49. Over the last 30 days, analyst projected EPS has increased 8.82% (from $0.68 to $0.74), while the price has changed 4.70% (from $8.30 to $8.69). The stock has had a couple of great days, gaining 10.13% over the last week.

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

Source: 5 Tech Stocks Undervalued by Earnings Growth and P/E Trends