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One way to gauge cash flow is with the operating cash flow/common equity ratio. This standardizes the number for comparison between firms of different sizes. Also, increases in the ratio over time indicate increases in cash flow return to shareholders’ investment.

We used this ratio to screen for companies seeing high growth in cash flows, comparing the trailing-twelve-month ratio with the company’s five-year average. We then screened for those deeply undervalued to target price, possibly indicating that the stock is undervalued. Finally, we searched for those stocks seeing significant net institutional buying over the current quarter (a.k.a. from the “smart money”).

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 (NYSEARCA:SPY) index over the last month.

(Click chart for more detail)

Do you think the smart money is calling it right on these names? Use this list as a starting-off point for your own analysis.

List sorted by net institutional purchases as a percent of share float.

1. Trex Co. Inc. (NYSE:TREX): Lumber, Wood Production Industry. Market cap of $337.50M. TTM operating cash flow/common equity at 0.42 vs. 5-year average at 0.12. Target price at $29.25 vs. current price at $21.69 (implies a potential upside of 29.05%). Institutional purchases for the current quarter at 1.6M, which is 11.61% of the company's share float. The stock is a short squeeze candidate, with a short float at 22.62% (equivalent to 17.03 days of average volume). The stock has had a couple of great days, gaining 7.38% over the last week.

2. Nanometrics Incorporated (NASDAQ:NANO): Scientific & Technical Instruments Industry. Market cap of $418.91M. TTM operating cash flow/common equity at 0.22 vs. 5-year average at 0.02. Target price at $23.00 vs. current price at $18.43 (implies a potential upside of 20.66%). Institutional purchases for the current quarter at 1.7M, which is 9.94% of the company's share float. The stock has gained 105.01% over the last year.

3. ION Geophysical Corporation (NYSE:IO): Scientific & Technical Instruments Industry. Market cap of $1.60B. TTM operating cash flow/common equity at 0.50 vs. 5-year average at 0.27. Target price at $13.00 vs. current price at $10.33 (implies a potential upside of 21.54%). Institutional purchases for the current quarter at 10.3M, which is 9.01% of the company's share float. This is a risky stock that is significantly more volatile than the overall market (beta = 3.37). The stock has had a couple of great days, gaining 7.38% over the last week.

4. Sunrise Senior Living Inc. (SRZ): Long-Term Care Facilities Industry. Market cap of $546.35M. TTM operating cash flow/common equity at 0.49 vs. 5-year average at 0.13. Target price at $12.00 vs. current price at $9.52 (implies a potential upside of 21.71%). Institutional purchases for the current quarter at 3.2M, which is 6.52% of the company's share float. The stock is a short squeeze candidate, with a short float at 10.55% (equivalent to 6.62 days of average volume). The stock has gained 259.25% over the last year.

5. Flotek Industries Inc. (NYSE:FTK): Specialty Chemicals Industry. Market cap of $499.80M. TTM operating cash flow/common equity at 0.92 vs. 5-year average at 0.32. Target price at $14.00 vs. current price at $10.01 (implies a potential upside of 33.22%). Institutional purchases for the current quarter at 2.2M, which is 5.61% of the company's share float. Exhibiting strong upside momentum--currently trading 15.46% above its SMA20, 20.1% above its SMA50, and 62.38% above its SMA200. The stock has had a couple of great days, gaining 15.99% over the last week.

6. Virgin Media, Inc. (NASDAQ:VMED): CATV Systems Industry. Market cap of $8.87B. TTM operating cash flow/common equity at 0.88 vs. 5-year average at 0.37. Target price at $35.50 vs. current price at $27.67 (implies a potential upside of 23.57%). Institutional purchases for the current quarter at 16.3M, which is 5.20% of the company's share float. The stock is a short squeeze candidate, with a short float at 7.82% (equivalent to 6.15 days of average volume). The stock has performed poorly over the last month, losing 10.24%.

*OpCF/Common equity and target price data sourced from Screener.co, institutional data sourced from Fidelity, all other data sourced from Finviz.

Source: 6 Undervalued, High Cash-Flow Growth Stocks the Smart Money Is Buying