One way to help determine whether a firm is undervalued is whether it is generating a lot of levered free cash flow relative to its market cap. Firms generating more cash relative to their market cap stand a greater chance of being undervalued.
Levered free cash flow is the cash flow available after paying interest on outstanding debt.
We ran a screen on stocks priced between $1 and $5 for those that have high levered free cash flow relative to market cap, as well as those that are undervalued relative to earnings growth (with PEG < 1).
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.
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Given the cash they’ve generated, 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 levered free cash flow as a percent of market cap.
1. ReneSola Ltd. (SOL): Semiconductor Industry. Market cap of $414.27M. Price at $4.68. PEG at 0.12. TTM levered free cash flow at $156.96M, which represents 38.66% of the company's market cap. This is a risky stock that is significantly more volatile than the overall market (beta = 2.94). The stock is currently stuck in a downtrend, trading 7.16% below its SMA20, 28.57% below its SMA50, and 50.4% below its SMA200. It's been a rough couple of days for the stock, losing 8.62% over the last week.
2. Pulse Electronics Corporation (PULS): Diversified Electronics Industry. Market cap of $183.17M. Price at $4.41. PEG at 0.8. TTM levered free cash flow at $61.74M, which represents 34.09% of the company's market cap. The stock is a short squeeze candidate, with a short float at 9.54% (equivalent to 23.19 days of average volume). The stock has gained 37.23% over the last year.
3. Mitel Networks Corp. (MITL): Communication Equipment Industry. Market cap of $214.32M. Price at $4.03. PEG at 0.18. TTM levered free cash flow at $49.54M, which represents 23.11% of the company's market cap. The stock is currently stuck in a downtrend, trading 9.87% below its SMA20, 17.54% below its SMA50, and 27.2% below its SMA200. It's been a rough couple of days for the stock, losing 7.99% over the last week.
4. Metropolitan Health Networks Inc. (MDF): Health Care Plans Industry. Market cap of $191.12M. Price at $4.57. PEG at 0.74. TTM levered free cash flow at $15.48M, which represents 8.25% of the company's market cap. The stock has gained 22.69% over the last year.
5. Westell Technologies Inc. (WSTL): Communication Equipment Industry. Market cap of $247.62M. Price at $3.58. PEG at 0.3. TTM levered free cash flow at $13.76M, which represents 5.62% of the company's market cap. The stock has gained 127.39% over the last year.
*Levered free cash flow data sourced from Yahoo! Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
