Mid cap companies offer an interesting opportunity: they offer the growth potential of smaller cap companies, yet they lack the stability of larger cap competitors. Today we focused on mid cap companies that have hoarded up strong cash reserves, which could launch the companies into a growth cycle, since the cash could be used for acquisitions, investments, or disruptive innovation via R & D. To sweeten the deal, we only selected for companies whose fundamentals indicate that they could be undervalued from a price-multiple standpoint. We arrived at a short, but interesting list of companies that are worth more research.
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/Sales ratio is a price-multiple valuation metric used to help identify if a firm is cheap by its twelve month trailing sales numbers. In the most basic terms it let's an investor know how much the investment community is willing to pay for every dollars worth of sales. A firm with a P/S ratio of one or lower would be viewed as cheap because investors are paying $1 or less for every dollars worth of a firm's sales. On the other hand, a firm is generally considered to be expensive when the P/S ratio is above three. These are general guidelines used by the investment community not hard rules to be clear. Price/Sales Ratio = Current Stock Price/Revenue (sales) per Share
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. The quick ratio is more conservative than the Current Ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
We first looked for mid cap stocks. We next screened for businesses that are trading at a discount when considering the company growth rate (PEG Ratio < 1)(P/S<1). We then looked for companies that have a substantial amount of cash on hand (Current Ratio>2)(Quick Ratio>2). We did not screen out any sectors.
Do you think these mid-cap stocks are undervalued and should be trading higher? Use our list to help with your own analysis.
1) Signet Jewelers Limited (SIG)
Signet Jewelers Limited has a Price/Earnings to Growth Ratio of 0.92, a Price/Sales Ratio of 0.94, a Current Ratio of 3.87, and a Quick Ratio of 2.08. The short interest was 3.82% as of 06/24/2012. Signet Jewelers Limited operates as a specialty jewelry retailer in the United States, the United Kingdom, the Republic of Ireland, and the Channel Islands. The company retails jewelry, watches, and associated services. As of January 28, 2012, it operated a network of 1,318 stores in 50 states in the United States that trade nationally in malls and off-mall locations as Kay Jewelers', and regionally under various mall-based brands, as well as operated as destination superstores under the Jared The Galleria Of Jewelry' trade name.
2) Guess' Inc. (GES)
Guess' Inc. has a Price/Earnings to Growth Ratio of 0.81, a Price/Sales Ratio of 0.96, a Current Ratio of 3.19, and a Quick Ratio of 2.33. The short interest was 9.74% as of 06/24/2012. Guess?, Inc. designs, markets, distributes, and licenses lifestyle collections of contemporary apparel and accessories for men, women, and children that reflect the American lifestyle and European fashion sensibilities. The company's clothing collection includes jeans, pants, skirts, dresses, shorts, blouses, shirts, jackets, knitwear, and intimate apparel.
3) MetroPCS Communications, Inc. (PCS)
MetroPCS Communications, Inc. has a Price/Earnings to Growth Ratio of 0.52, a Price/Sales Ratio of 0.49, a Current Ratio of 2.47, and a Quick Ratio of 2.15. The short interest was 1.80% as of 06/24/2012. MetroPCS Communications, Inc., a wireless telecommunications carrier, together with its subsidiaries, provides wireless broadband mobile services in the United States. Its services comprise voice services, such as local, domestic long distance, and international call services; and data services, including domestic and international text messaging, multimedia messaging, mobile Internet access, mobile instant messaging, location based services, social networking services, push e-mail, and multimedia streaming and downloads, as well as services provided through the binary runtime environment for wireless, Blackberry, Windows, and the Android platforms comprising ringtones, ring back tones, games, content, and applications. The company also offers custom calling features consisting of caller ID, call waiting, three-way calling, and voicemail services.
4) Konami Corp. (KNM)
|Industry:||Multimedia & Graphics Software|
Konami Corp. has a Price/Earnings to Growth Ratio of 0.33, a Price/Sales Ratio of 0.96, a Current Ratio of 2.39, and a Quick Ratio of 2.06. The short interest was 0.01% as of 06/24/2012. Konami Corporation develops, publishes, markets, and distributes video game software products for stationary and portable consoles, as well as for use on personal computers. It operates in four segments: Digital Entertainment, Gaming & Systems, Pachinko & Pachinko Slot Machines, and Health & Fitness. The Digital Entertainment segment offers video game software, social games for social networking services Web sites, content for mobile phones and token-operated games, online games, music and video package products, video games for amusement facilities, and card games, as well as electronic toys, figures, and character goods. This segment also builds computer systems related to online games, maintains and operates online servers, and purchases and distributes video game software for home use.
*Company profiles were sourced from Finviz. Financial data was sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.