Small-cap stocks tend to offer investors greater growth opportunities than large-cap alternatives, although this comes with its fair share of added risk. To mitigate that risk, we searched for companies whose fundamentals indicate that they are undervalued from a price-multiple perspective. As a way to hone in on the cream of the crop, we only looked at companies with analyst ratings of 'Buy' or better. You might be interested in the list our screen produced.
The PEG ratio (price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth. In general, the P/E ratio is higher for a company with a higher growth rate. Thus using just the P/E ratio would make high-growth companies appear overvalued relative to others. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates. A lower ratio is 'better' (cheaper) and a higher ratio is 'worse' (expensive) - a PEG ratio of 1 means the company is fairly priced.
The Price/Cash Flow ratio is a price-multiple valuation metric that also measures a firm's future financial health. An advantage of using cash flow is that it removes non-cash factors, which helps provide a clearer picture of how much money the firm is taking in from a valuation standpoint. Price/Cash Flow Ratio = Current Stock Price/Cash Flow Per Share
We first looked for small cap industrial stocks. We then looked for businesses that analysts rate as "Buy" or "Strong Buy" (mean recommendation < 3). We then looked for companies that appear undervalued to earnings growth (PEG < 1)(P/CFO<10).
Do you think these small-cap stocks will break through to new highs? Please use our list to assist with your own analysis.
1) Hollysys Automation Technologies, Ltd (NASDAQ:HOLI)
|Industry:||Industrial Electrical Equipment|
Hollysys Automation Technologies, Ltd has a Analysts' Rating of 2.00, a Price/Earnings to Growth Ratio of 0.66, and a Price/Cash Flow Ratio of 3.70. The short interest was 14.43% as of 06/12/2012. Hollysys Automation Technologies Ltd. provides automation and control technologies and applications to customers in the industrial, railway, subway, and nuclear industries in China and south-east Asia. It offers distributed control systems, which are networks of controllers, sensors, actuators and other devices that can be programmed to control outputs based on input conditions and/or algorithms; programmable logic controllers that are small computer devices installed on machines or equipment; and train control centers (TCC), which monitor route condition, track status, train schedules, distance between trains, and the working status of other essential function devices.
2) Global Power Equipment Group Inc. (NASDAQ:GLPW)
Global Power Equipment Group Inc. has a Analysts' Rating of 2.20, a Price/Earnings to Growth Ratio of 0.42, and a Price/Cash Flow Ratio of 3.45. The short interest was 3.55% as of 06/12/2012. Global Power Equipment Group Inc. and its subsidiaries designs, engineers, and manufactures gas turbine auxiliary equipment; and provides routine and specialty maintenance services to customers in the utility and industrial sectors. Its gas turbine auxiliary equipment include filter houses, inlet systems, exhaust systems, diverter dampers, selective catalytic emission reduction systems, packaged skids, and precision parts and specialty fabrications. These products are primarily used in the operation of gas turbine power plants, as well as for other industrial, energy, and power-related applications.
3) Hillenbrand, Inc. (NYSE:HI)
Hillenbrand, Inc. has a Analysts' Rating of 2.00, a Price/Earnings to Growth Ratio of 0.87, and a Price/Cash Flow Ratio of 19.25. The short interest was 3.71% as of 06/12/2012. Hillenbrand, Inc. designs, manufactures, distributes, and sells funeral service products to licensed funeral directors operating licensed funeral homes. The company's products include burial caskets, cremation caskets, containers, vaults, urns, and selection room display fixturing for funeral homes, as well as other personalization and memorialization products and services, including Web-based applications, and the creation and hosting of Websites for licensed funeral homes. It markets its products under the Batesville and Options brand name through direct sales force in the United States, Puerto Rico, Canada, Mexico, the United Kingdom, and Australia.
*Company profiles were sourced from Finviz. Financial data was sourced from Finviz and Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.