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With the broader marketing sentiment entering into what appears to be a prolonged shrugging off of incessant negative news, the market maintains an underlying bullish stance. Astute investors will at this time, be cautiously drilling deep towards finding value plays which provide the strongest fundamentals and limited downside, while the potential for a broader market downturn remains ever present.

At these times, one of the better plays is to construct a market-neutral (non-directional) hedged portfolio, entering long a selection of deep value plays, fully hedged by a short position in the S&P 500 index (NYSEARCA:SPY). Effectively a long stock/short S&P pair trade, the strategy would consist of entering long for example, $20k x 5 stocks (totaling $100k), with a simultaneous $100k short position in the SPY. This results in a non-directional, dollar-neutral wager on the 5-stock portfolio outperforming the S&P.

In my search for the most attractive, undervalued companies, I look for stocks (as a key starting point), with significant, high free-cash-flow-yields, supported by additional fundamental metrics (low PEG, low P/Book, consistent earnings growth, bullish consensus analyst mean target, etc.). Below are the 5 stocks I am currently long, hedged by equal dollar value short S&P ...

1: Computer Sciences Corporation (NYSE:CSC)

Computer Sciences, a technology company operating within the information technology services industry, currently generates free-cash-flow of $1.01 Billion (trailing 12 month), with an enterprise-value of $6.61 Billion, resulting in a significant free-cash-flow-yield (FCF/EV) of 15.3%.

CSC Stock Chart & Trend Signals
(Click to enlarge)

Additional metrics in favor of CSC include a low PEG ratio of 0.91, price/book of 0.76, a book-to-market (book value based on historical cost) of 1.32, and analyst mean target price of $43.85 per share. The stock is currently trading at $37.12 per share.

2: Rimage Corporation (RIMG)

Rimage Corporation, a technology company operating within the computer peripherals industry, currently generates free-cash-flow of $12.07 million (trailing 12 month), with an enterprise-value of $18.58 million, resulting in a superior free-cash-flow-yield (FCF/EV) of 64.9%.

RIMG Stock Chart & Trend Signals
(Click to enlarge)

Additional metrics in favor of RIMG include zero total and long-term debt/equity, five year average ROE exceeding 10%, a book-to-market (book value based on historical cost) of 0.94, and analyst mean target price of $17 per share. The stock is currently trading at $14.63 per share.

3: TAM S.A. (NYSE:TAM)

TAM, a Brazilian services company operating within the major airlines industry, currently generates free-cash-flow of $462.8 million (trailing 12 month), with an enterprise-value of $2.02 Billion, resulting in a healthy free-cash-flow-yield (FCF/EV) of 22.9%.

TAM Stock Chart & Trend Signals
(Click to enlarge)

Additional metrics in favor of TAM include a price/sales ratio of 0.48, an industry beating price/cash ratio of 2.98, a return-on-equity (trailing 12 month) of 47.87%, a book-to-market (book value based on historical cost) of 0.72, and a low (relative to industry) debt/equity ratio of 4.28. The stock is currently trading at $23.04 per share.

4: Cisco Systems Inc. (NASDAQ:CSCO)

Cisco Systems, a technology company operating within the networking and communication devices industry, currently generates free-cash-flow of $9.25 Billion (trailing 12 month), with an enterprise-value of $58.10 Billion, resulting in a robust free-cash-flow-yield (FCF/EV) of 15.9%.

CSCO Stock Chart & Trend Indicator
(Click to enlarge)

Additional metrics in favor of CSCO include a debt/equity ratio of 0.81, a book-to-market (book value based on historical cost) of 0.55, a price/cash ratio of 1.96, and analyst mean target price of $20.59 per share. The stock is currently trading at $15.49 per share, maintaining strong resilience to the recent market downturn.

5: Northrop Grumman Corporation (NYSE:NOC)

Northrop Grumman Corporation, a conglomerate operating within the global aerospace and defense technology industry, currently generates free-cash-flow of $2.08 Billion (trailing 12 month), with an enterprise-value of $19.55 Billion, resulting in a healthy free-cash-flow-yield (FCF/EV) of 10.6%.

NOC Stock Chart & Trend Signals
(Click to enlarge)

Additional metrics in favor of NOC include a PEG ratio of 1.21, price/sales ratio of 0.57, institutional ownership of 94.22%, debt/equity ratio of 1.11, a book-to-market (book value based on historical cost) of 0.65, and operating earnings yield (removes non-operating expenses from the earnings) of 10.63%. The stock is currently trading at $67.14 per share.

Enterprise Value/Free-Cash-Flow Data Sourced From Yahoo Finance. Stock Data & Performance Analytics Sourced From TradePilot.com.

Source: 5 Undervalued Stocks Offering Strong Free Cash Flow Yields vs. the S&P