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When it comes to bargain shopping, we all hope that we are getting a great deal. Unfortunately, there are those unavoidable instances when you bring home an item that is on clearance for good reason. To avoid that dilemma when considering stocks, it is helpful to employ discernment. We took a look at small cap industrial stocks that appear to be undervalued after analyzing their growth rate. Additionally, they all have significant cash reserves. This is an indicator that the included companies have the necessary resources to realize those growth projections, cover expenses and follow through on strategic goals.

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/Earnings ratio is one of the most commonly used price-multiple metrics. Often, EPS from the last four quarters is used to derive this number. A firm that has a high P/E ratio generally indicates that investors have high expectations of the firm relative to future earnings growth. By the opposite token, investors generally have lower expectations of a firm with a low P/E ratio. A firm that holds a P/E below 10 could be viewed as having "value investment" potential. One thing to remember is that EPS is an accounting measure that could be potentially manipulated. Thus the P/E is only as good as the quality of the earnings.

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 small cap industrial stocks. From here, we then looked for companies that are undervalued when company growth rate is taken into account (PEG Ratio < 1)(P/E<10). We then looked for businesses that have a substantial amount of cash on hand (Current Ratio>2)(Quick Ratio>2).

Do you think these small-cap stocks hold value that has yet to be priced in? Use this list as a starting-off point for your own analysis.

1) Global Power Equipment Group Inc. (GLPW)

Sector:Industrial Goods
Industry:Diversified Machinery
Market Cap:$354.80M

Global Power Equipment Group Inc. has a Price/Earnings to Growth Ratio of 0.45, a Price/Earnings Ratio of 5.53, a Current Ratio of 3.96, and a Quick Ratio of 3.85. The short interest was 7.14% as of 07/31/2012. 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.

2) LSB Industries Inc. (LXU)

Sector:Industrial Goods
Industry:General Building Materials
Market Cap:$718.90M

LSB Industries Inc. has a Price/Earnings to Growth Ratio of 0.98, a Price/Earnings Ratio of 9.78, a Current Ratio of 3.68, and a Quick Ratio of 2.90. The short interest was 3.29% as of 07/31/2012. LSB Industries, Inc., through its subsidiaries, engages in the manufacture and sale of geothermal and water source heat pumps, air handling products, and chemical products. The company operates in two segments, Climate Control Business and Chemical Business. The Climate Control Business segment manufactures and sells heating, ventilation, and air conditioning (HVAC) products that include geothermal and water source heat pumps; hydronic fan coils; and other HVAC products, such as custom air handlers and modular geothermal chillers.

3) Hollysys Automation Technologies, Ltd (HOLI)

Sector:Industrial Goods
Industry:Industrial Electrical Equipment
Market Cap:$439.38M

Hollysys Automation Technologies, Ltd has a Price/Earnings to Growth Ratio of 0.60, a Price/Earnings Ratio of 8.55, a Current Ratio of 2.45, and a Quick Ratio of 2.28. The short interest was 11.16% as of 07/31/2012. 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.

*Company profiles were sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 3 Undervalued Small Cap Industrials With Ample Cash Reserves