4 Undervalued Small Caps With Strong Profits

Includes: CEL, SFG, SHS, TPX
by: ZetaKap

Small-cap stocks can offer greater rewards than large-cap peers, although this comes with its greater levels of risk. To reduce that risk, today we searched for small cap companies whose fundamentals indicate that they know how to reliably return a substantial profit. We focused further on companies that look undervalued, suggesting that now is the time to do more research and due diligence on these stocks. You might like the list our screen produced.

The Net Margin is a profitability metric that illustrates, by percentage, how much of every dollar earned gets turned into a bottom line profit. This is just one of many profitability metrics used by investors and analysts to better understand what the company is being left with at the end of the day. Generally, a firm that can expand its net profit margins over a period of time will see its stock price rise as well due to the trend of increasing profitability. Net Margin = Net Income/Total Revenue

Return on Equity [ROE] is one way to identify great potential names relative to profitability. This ratio illustrates the percentage return on shareholder equity. As well, this metric segments the company into operational efficiency, asset use efficiency, and financial leverage. Why does this matter? Simply put, it allows investors to get a real picture of how the company is generating these returns and helps identify parts of the company that may be underperforming.

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 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.

We first looked for small cap stocks. We then looked for businesses that have strong bottom line profitability (Net Margin [TTM]>10%)(ROE [TTM]>30%). We then looked for businesses that are trading at a discount (P/S<1)(PEG < 1). We did not screen out any sectors.

Do you think these small-cap stocks are undervalued? Use our list along with your own analysis.

1) Tempur Pedic International Inc. (NYSE:TPX)

Sector: Consumer Goods
Industry: Home Furnishings & Fixtures
Market Cap: $1.34B
Beta: 2.05

Tempur Pedic International Inc. has a Net Margin of 15.41%, a Return on Equity of 183.82%, a Price/Sales Ratio of 0.90, and a Price/Earnings to Growth Ratio of 0.46. The short interest was 12.31% as of 06/27/2012. Tempur-Pedic International Inc. engages in the manufacture, marketing, and distribution of bedding products in North America and internationally. It offers mattresses, pillows, and adjustable bed bases, as well as various cushions and other comfort products. The company sells its products under the TEMPUR and Tempur-Pedic brand names through furniture and bedding retailers, and non-spring and department stores; direct response program, Internet, and company-owned stores; hospitals, nursing homes, healthcare professionals, and medical retailers; and third party distributors.

2) StanCorp Financial Group Inc. (NYSE:SFG)

Sector: Financial
Industry: Accident & Health Insurance
Market Cap: $1.55B
Beta: 1.65

StanCorp Financial Group Inc. has a Net Margin of 19.66%, a Return on Equity of 34.30%, a Price/Sales Ratio of 0.45, and a Price/Earnings to Growth Ratio of 0.23. The short interest was 6.98% as of 06/27/2012. StanCorp Financial Group, Inc., together with its subsidiaries, provides financial products and services in the United States. The company operates in two segments, Insurance Services and Asset Management. The Insurance Services segment offers group and individual disability insurance; group life, and accidental death and dismemberment insurance; group dental and group vision insurance; and absence management services to individuals and employers.

3) Cellcom Israel Ltd. (NYSE:CEL)

Sector: Technology
Industry: Wireless Communications
Market Cap: $594.89M
Beta: 0.71

Cellcom Israel Ltd. has a Net Margin of 10.64%, a Return on Equity of 222.83%, a Price/Sales Ratio of 0.36, and a Price/Earnings to Growth Ratio of 0.55. The short interest was 2.05% as of 06/27/2012. Cellcom Israel Ltd. provides cellular communications services in Israel. It offers basic and advanced cellular telephone services, text and multimedia messaging services, and advanced cellular content and data services. The company's basic cellular telephony services consist of voice mail, cellular fax, call waiting, call forwarding, caller identification, conference calling, Talk 2, additional number, and collect call services; and outbound roaming services.

4) Sauer-Danfoss Inc. (NYSE:SHS)

Sector: Industrial Goods
Industry: Diversified Machinery
Market Cap: $1.65B
Beta: 2.35

Sauer-Danfoss Inc. has a Net Margin of 12.25%, a Return on Equity of 47.58%, a Price/Sales Ratio of 0.80, and a Price/Earnings to Growth Ratio of 0.53. The short interest was 4.32% as of 06/27/2012. Sauer-Danfoss Inc., together with its subsidiaries, engages in the design, manufacture, and sale of engineered hydraulic and electronic systems, and components that generate, transmit, and control power in mobile equipment worldwide. It offers closed circuit axial and bent axis piston hydrostatic transmissions for the propulsion of mobile equipment; open circuit piston pumps used to transform mechanical power from the engine to hydraulic power for various functions of the vehicle; geroller and gerotor motors used for propel and work functions; and hydrostatic steering units to convert steering wheel motion into hydraulic flow and pressure. The company also provides electronic controls, including microprocessor-based controllers, intelligent displays, joysticks, and electronic sensors, as well as develops and licenses software that helps its customers to integrate components into systems; and proportional valves, such as electro hydraulic valves for forestry and agricultural harvesting equipment, and mechanically actuated valves for construction equipment.

*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.