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Here we offer an interesting way to find potentially undervalued opportunities. Under the theoretical assumption that P/E is equal to a constant K, growth in EPS estimates should be matched by proportionate growth in price. When they don’t match up, a mispricing may have occurred.

We used this idea to screen for potentially undervalued stocks among the universe of companies whose trailing-twelve-month net profit margin exceeded their 5-year average by at least 20%. The screen produced 5 stocks, listed below.

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.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the 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.

Do you think these companies’ profitability is being fully priced in? Use this list as a starting-off point for your own analysis.

List sorted by difference between increase in projected EPS and increase in price.

1. TiVo Inc. (NASDAQ:TIVO): CATV Systems Industry. Market cap of $1.29B. TTM net profit margin at 33.69% vs. 5-year average at -6.78%. Over the last 30 days, analyst projected EPS has increased 57% (from $0.35 to $0.55), while the price has increased 7.06% (from $10.06 to $10.77). The stock has gained 38.68% over the last year.

2. Nordion Inc. (NYSE:NDZ): Specialized Health Services Industry. Market cap of $714.84M. TTM net profit margin at 8.82% vs. 5-year average at -15.23%. Over the last 30 days, analyst projected EPS has increased 45.45% (from $0.55 to $0.80), while the price has increased 8.20% (from $10.25 to $11.09). Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.6%, current ratio at 2.38, and quick ratio at 1.89. The stock has gained 25% over the last year.

3. SIRIUS XM Radio Inc. (NASDAQ:SIRI): Broadcasting Industry. Market cap of $8.76B. TTM net profit margin at 2.77% vs. 5-year average at -85.71%. Over the last 30 days, analyst projected EPS has increased 25.0% (from $0.04 to $0.05), while the price has increased 8.87% (from $2.03 to $2.21). The stock has had a couple of great days, gaining 5.71% over the last week.

4. Momenta Pharmaceuticals Inc. (NASDAQ:MNTA): Biotechnology Industry. Market cap of $1.06B. TTM net profit margin at 57.71% vs. 5-year average at -111.10%. Over the last 30 days, analyst projected EPS has increased 9.38% (from $2.56 to $2.80), while the price has increased 6.60% (from $19.38 to $20.66). The stock is a short squeeze candidate, with a short float at 16.57% (equivalent to 11.64 days of average volume). The stock has had a couple of great days, gaining 5.71% over the last week.

5. DepoMed Inc. (NASDAQ:DEPO): Drug Manufacturers Industry. Market cap of $463.17M. TTM net profit margin at 71.74% vs. 5-year average at -9.60%. Over the last 30 days, analyst projected EPS has increased 1.85% (from $1.62 to $1.65), while the price has increased 0.83% (from $8.46 to $8.53). The stock is a short squeeze candidate, with a short float at 11.89% (equivalent to 7.52 days of average volume). The stock has had a couple of great days, gaining 6.02% over the last week.

*Net profit margin data sourced from Screener.co, EPS and price data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: 5 Highly Profitable Stocks Undervalued by EPS Trends