Looking for smaller and potentially undervalued companies to add to your portfolio? We ran a screen with this in mind.
We started by screening for small cap service stocks in the service sector. The service sector has been one of the top performing of the year (just over 30%). And since smaller cap companies are often expected to price in more growth in positive economic cycles, we wanted to narrow down to this sub-sector.
To find names that might still be undervalued, we took only the names with a P/E below 12. According to Finviz, the average P/E for the service sector is 17.61.
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.
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research
Tool provided by Kapitall (www.kapitall.com).
Do you think these stocks should be trading higher? Use this list as a starting point for your own analysis. List sorted by P/E ratio. List Average 1-Year Return: 48%
1. Fisher Communications, Inc. (FSCI): Fisher Communications, Inc., an integrated media company, through its subsidiaries, engages in television and radio broadcasting businesses. Market cap at $325.72M, most recent closing price at $36.68. PE at 8.97. MRQ net profit margin at 10.13% vs. 8.97% y/y. MRQ sales/assets at 0.167 vs. 0.14 y/y. MRQ assets/equity at 1.233 vs. 1.714 y/y.
2. Deluxe Corp. (DLX): Provides various personalized printed products, promotional products, and merchandising materials to small businesses and financial institutions in the United States, Canada, and Europe. Market cap at $1.58B, most recent closing price at $31.27. PE at 9.86. MRQ net profit margin at 11.39% vs. 10.24% y/y. MRQ sales/assets at 0.261 vs. 0.259 y/y. MRQ assets/equity at 3.962 vs. 5.026 y/y.
3. Belo Corp. (BLC): Operates as a television company. Market cap at $741.99M, most recent closing price at $7.94. PE at 10. MRQ net profit margin at 14.6% vs. 10.87% y/y. MRQ sales/assets at 0.109 vs. 0.106 y/y. MRQ assets/equity at 5.482 vs. 5.896 y/y.
4. PC Connection, Inc. (PCCC): Operates as a direct marketer of various information technology solutions. Market cap at $334.06M, most recent closing price at $12.63. PE at 10.66. MRQ net profit margin at 1.63% vs. 1.46% y/y. MRQ sales/assets at 1.121 vs. 1.112 y/y. MRQ assets/equity at 1.683 vs. 1.714 y/y.
5. Spirit Airlines, Inc. (SAVE): Provides passenger airline service primarily to leisure travelers and travelers visiting friends and relatives. Market cap at $1.25B, most recent closing price at $17.19. PE at 11.32. MRQ net profit margin at 9.99% vs. 6.13% y/y. MRQ sales/assets at 0.398 vs. 0.389 y/y. MRQ assets/equity at 1.649 vs. 1.71 y/y.
6. JetBlue Airways Corporation (JBLU): Provides passenger air transportation services in the United States. Market cap at $1.45B, most recent closing price at $5.09. PE at 11.63. MRQ net profit margin at 4.07% vs. 2.17% y/y. MRQ sales/assets at 0.179 vs. 0.167 y/y. MRQ assets/equity at 3.874 vs. 4.088 y/y.
*Accounting data sourced from Google Finance, all other data sourced from Finviz.