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Value Plus Growth: Finding Undervalued Stocks In A Bull Market

James Dennin, Kapitall: With some undervalued stocks starting to get expensive, how do we find good buys in the bull market?

So everyone knows the stock market has been doing pretty well lately. According to data compiled by Bloomberg, the current market rally has taken the S&P 500 up a whopping 166% – a robust 40 percentage points higher than the average gain posted during bull markets.

Read more from Kapitall: Value Investing: John Thompson Says Ditch Tech, Buy Big Banks

Predictably, as the market keeps going up, things start to get more expensive. And w hether or not you're partial to value investing – with a philsophy of buy low, sell high – this strategy has relevance in any market. 

But that's a lot harder to do when everyone's doing well. Price dispersion among P/E ratios on the S&P reached its lowest level of all time – around 41% – in June and has stayed there ever since. That means companies with low growth prospects are trading at similar valuations to those with higher growth expectations. 

Investing ideas

While some analysts are concerned that this development leaves the stock market with nowhere to go but down – others argue that it's still not done adjusting back to fair value after the financial crisis.

This bull market has already lasted longer than the average bull market lasts, but analysts are also in agreement that the growth prospects for 2014 will be the best they've been in years. 

With that in mind, we decided to run a screen for stocks using both a value and a growth metric. To find undervalued stocks, we looked for companies with at least a 15% upside based on their Graham Number – which looks at book value per share and earnings to get an idea of a fair value for the company. 

Then we combined that list with a growth metric – in this case encouraging inventory trends – which occurs when higher revenue corresponds with shrinking inventory. This can indicate a growing demand for that company's product, as well as more efficient corporate governance.  

There were six undervalued stocks left on our list.

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Chart of I:DJI
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