Do you consider yourself a contrarian investor? For a look at potentially underestimated and undervalued names, we ran a screen.
We began by screening for highly shorted stocks, with float shorts above 10%. We then screened for those that appear undervalued relative to earnings growth, with PEG below 1.
Then to analyze these companies' profitability, we ran DuPont analysis on the names. DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Because increases in net margin and asset turnover are considered good things, DuPont focuses on companies with these positive characteristics: Increasing ROE along with,
- Decreasing leverage, (i.e. decreasing Asset/Equity ratio)
- Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)
Those companies that pass DuPont are seeing positive trends in the sources of their increasing profitability, which adds further weight to the idea that the names are profitable.
Interactive Chart: Press Play to compare changes in market cap 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.
Do you think these stocks are suffering from excessive pessimism? Use this list as a starting point for your own analysis.
List sorted by float short.
1. Vera Bradley, Inc. (VRA): Engages in the design, production, marketing, and retail of functional accessories for women under the Vera Bradley brand. Market cap at $1.05B, most recent closing price at $25.64. PEG at 0.86. Float short at 51.56%. MRQ net profit margin at 14.94% vs. 13.01% y/y. MRQ sales/assets at 0.613 vs. 0.531 y/y. MRQ assets/equity at 1.77 vs. 3.203 y/y.
2. Twin Disc Inc. (TWIN): Designs, manufactures, and sells marine and heavy duty off-highway power transmission equipment. Market cap at $242.54M, most recent closing price at $20.50. PEG at 0.58. Float short at 22.72%. MRQ net profit margin at 9.83% vs. 5.95% y/y. MRQ sales/assets at 0.293 vs. 0.26 y/y. MRQ assets/equity at 2.083 vs. 2.557 y/y.
3. AFLAC Inc. (AFL): Provides supplemental health and life insurance. Market cap at $20.73B, most recent closing price at $43.37. PEG at 0.82. Float short at 17.84%. MRQ net profit margin at 12.58% vs. 7.6% y/y. MRQ sales/assets at 0.054 vs. 0.051 y/y. MRQ assets/equity at 8.47 vs. 9.548 y/y.
4. BorgWarner Inc. (BWA): Engages in the manufacture and sale of engineered automotive systems and components primarily for power train applications worldwide. Market cap at $8.72B, most recent closing price at $78.25. PEG at 0.68. Float short at 14.52%. MRQ net profit margin at 8.26% vs. 7.19% y/y. MRQ sales/assets at 0.304 vs. 0.288 y/y. MRQ assets/equity at 2.363 vs. 2.604 y/y.
5. Portfolio Recovery Associates Inc. (PRAA): Provides outsourced receivables management and related services in the US. Market cap at $1.15B, most recent closing price at $65.65. PEG at 0.8. Float short at 13.26%. MRQ net profit margin at 22.52% vs. 20.49% y/y. MRQ sales/assets at 0.11 vs. 0.101 y/y. MRQ assets/equity at 1.799 vs. 2.03 y/y.
6. Weight Watchers International, Inc. (WTW): Provides weight management services worldwide. Market cap at $4.59B, most recent closing price at $62.55. PEG at 0.98. Float short at 11.64%. MRQ net profit margin at 15.86% vs. 13.71% y/y. MRQ sales/assets at 0.358 vs. 0.327 y/y. MRQ assets/equity at -2.737 vs. -1.572 y/y.
7. Community Health Systems, Inc. (CYH): Provides healthcare services through the operation of hospitals in the United States. Market cap at $2.23B, most recent closing price at $23.70. PEG at 0.71. Float short at 10.61%. MRQ net profit margin at 1.99% vs. 1.83% y/y. MRQ sales/assets at 0.239 vs. 0.228 y/y. MRQ assets/equity at 6.363 vs. 6.368 y/y.
8. Beacon Roofing Supply Inc. (BECN): Distributes residential and non-residential roofing materials in the United States and Canada. Market cap at $1.22B, most recent closing price at $25.87. PEG at 0.86. Float short at 10.36%. MRQ net profit margin at 3.9% vs. 2.48% y/y. MRQ sales/assets at 0.425 vs. 0.389 y/y. MRQ assets/equity at 2.039 vs. 2.149 y/y.
*Accounting data sourced from Google 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.