Looking for a deal? So are hedge funds – so we found five undervalued stocks attracting institutional investors.
The US stock market hit the ground running this week. Which begs the question: is it time for investors to go all in, or take some gains? We decided to see what major institutional investors have been up to.
[Dig Deeper: Compare analyst ratings to annual returns for stocks mentioned.]
We began by screening for all stocks traded in the US that experienced significant net institutional purchases over the last quarter, representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these stocks to outperform in the future.So why are these companies appealing to institutional buyers? Next we looked for signs of undervaluation, starting with price/earnings to growth – PEG – ratios. A low PEG ratio, typically under 1, suggests a stock is undervalued relative to earnings growth. The PEG ratio is used to determine a stock's value while providing a broader picture than just the P/E ratio. This left us with about 40 names, so we screened for an additional sign of undervaluation: a stock's Graham Number. The Graham Number is a measure of maximum fair value based on a stock's EPS and book value per share (BVPS), created by the champion of value investing Benjamin Graham. Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS) The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may also be considered undervalued. This left us with five stocks on our list. Click on the interactive chart to see data over time. Do you agree that these stocks look undervalued? Use the list below as a starting point for your own analysis.