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"Small Island" - Big Economy: 4 Stock Picks In The UK

James Dennin, Kapitall: The British economy is improving faster than anyone expected. What could this mean for American investors? 

Britain may be a small island, but its economy is improving fast, no matter what Russian President Vladimir Putin's aides have to say

In fact, this is the fastest the UK economy has moved since the recession began, and economists have upgraded their growth forecasts through 2015. GDP growth, construction output, exports, and consumer spending are all growing at a pace that beats the expectations of analysts. The only question that remains is whether the positive data and improved outlook will accelerate a drop in unemployment, which is still pretty high for the UK - about 7.7%.

[Read more from Kapitall: For Profit Schools: Investing in our Health?]

With that in mind we decided to take a look at British stocks that trade on the New York Stock Exchange, to see if American investors can benefit from the good news from our neighbors across the pond. We started with a fairly limited universe of 40 UK companies trading in the US, and then screened them for positive growth indicators, looking at inventory trends, earnings, and levered-free-cash flow for signs of companies that might be undervalued. Despite the more bullish environment, we were left with just four stocks on our list. 

Click on the interactive charts below to see data over time. 

The pharmaceutical giant GlaxoSmithKline plc (GSK) has had a bad summer in terms of public relations. It was embroiled in a bribery scandal still being investigated by the Chinese government. And it also lost important battles with American generic drug manufacturers, who gained approval to make versions of some of GlaxoSmithKline's best-selling products. However it still turned up in our screen, for a number reasons.

For one, the stock has added significantly to its earnings per share (EPS), while its stock price has stayed relatively steady. EPS is up over 10% while the price of the stock has hardly changed at all. Eventually, investors will have to wonder when the market will factor the firm's new earnings into its stock price, and Insider Monkey  reports that a number of their favorite hedge funds have been purchasing the stock as well.    

Another company with an EPS/Price mis-match is the resource extractor  BHP Billiton plc (BBL). Registered in the UK and listed on the London Stock Exchange as well as the NYSE, BHP is actually a dual-listed company, with the majority side (BHP BIlliton Ltd.) listed on the Australian Securities Exchange. The company's actual headquarters is located in Melbourne, Australia, but it has a major management office based in London. 

Over the last 30 days, BBL has added to its EPS by over 5%, while at the same time the price of the stock went down. Part of this has to do with a fall in commodities prices. The company, which extracts a lot of iron and coal, has benefited greatly from China's ascendance and the ensuing building boom. Profits plummeted 30%, although the fact that its EPS remained high throughout a bad market for raw materials says a lot about BHP management. It also distributes a robust dividend, around 3.8%, which has garnered loyalty from shareholders. 

Two British companies in our results appear undervalued for different reasons. Ensco plc (ESV) has been adding revenue faster than it can replace its inventory – although this is not particularly surprising. As a drilling company it stands to benefit from a British energy boom. Investors interested in this sector of the British economy are playing close attention to new environmental laws, as the UK's leaders try and find a way to replicate American fracking without infuriating local communities.

The final stock in our screen is technology small-cap  Xyratex Ltd. (XRTX), which is undervalued according to its levered free cash flow to enterprise value ratio (LFCF/EV), which looks at the amount of cash that a company brings in relative to an approximation of the company's value as a whole – including market cap, investments, and debt. A ratio of 10% indicates a company might be undervalued, and Xyratex's ratio is 20.34%. 

Do you see investment opportunities across the pond? Use the list below as a starting point for your own analysis. 

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