5 Undervalued Stocks Intriguing Institutional Investors

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. 

1. CPI Aerostructures Inc. ( CVU): Engages in the contract production of structural and other aircraft parts for prime defense contractors, the United States Air Force, and other branches of the armed forces. Market cap at $97.93M, most recent closing price at $11.67.

Net institutional purchases in the current quarter at 479.1K shares, which represents about 7.27% of the company's float of 6.59M shares. The top two holders of the stock are Austin W. Marxe & David M. Greenhouse (11.09%) and Rutabaga Capital Management, LLC (7.44%).

Diluted TTM earnings per share at 1.17, and a MRQ book value per share value at 10.08, implies a Graham Number fair value = sqrt(22.5*1.17*10.08) = $16.29. 

Based on the stock's price at $11.67, this implies a potential upside of 39.59% from current levels. 

PEG: 0.66

 

2. Heritage Oaks Bancorp ( HEOP): Operates as the holding company for Heritage Oaks Bank that provides commercial banking services to retail customers, and small to medium-sized businesses in California. Market cap at $158.82M, most recent closing price at $6.32.

Net institutional purchases in the current quarter at 1.9M shares, which represents about 13.71% of the company's float of 13.86M shares. The top two holders of the stock are Patriot Financial Partners GP, LP (14.63%) and Castle Creek Capital Partners IV, LP (9.79%).

Diluted TTM earnings per share at 0.56, and a MRQ book value per share value at 4.85, implies a Graham Number fair value = sqrt(22.5*0.56*4.85) = $7.82. 

Based on the stock's price at $6.32, this implies a potential upside of 23.69% from current levels. 

PEG: 0.72

 

3. Hardinge Inc. ( HDNG): Engages in the design, manufacture, and distribution of machine tools. Market cap at $170.98M, most recent closing price at $14.66.

Net institutional purchases in the current quarter at 638.5K shares, which represents about 5.62% of the company's float of 11.37M shares. The top two holders of the stock are Franklin Resources, Inc (8.16%) and Dimensional Fund Advisors LP (7.94%).

Diluted TTM earnings per share at 1.21, and a MRQ book value per share value at 13.61, implies a Graham Number fair value = sqrt(22.5*1.21*13.61) = $19.25. 

Based on the stock's price at $14.66, this implies a potential upside of 31.3% from current levels. 

PEG: 0.41

 

4. LeapFrog Enterprises Inc. ( LF): Provides technology-based learning platforms worldwide. Market cap at $641.07M, most recent closing price at $9.40.

Net institutional purchases in the current quarter at 7.1M shares, which represents about 11.92% of the company's float of 59.56M shares. The top two holders of the stock are Wellington Management Company, LLP (9.95%) and Wells Fargo & Company (7.10%).

Diluted TTM earnings per share at 1.39, and a MRQ book value per share value at 4.8, implies a Graham Number fair value = sqrt(22.5*1.39*4.8) = $12.25. 

Based on the stock's price at $9.4, this implies a potential upside of 30.34% from current levels. 

PEG: 0.38

 

5. CACI International Inc. ( CACI): Provides information technology (IT) and professional services to the U. Market cap at $1.56B, most recent closing price at $67.60.

Net institutional purchases in the current quarter at 1.8M shares, which represents about 8.93% of the company's float of 20.16M shares. The top two holders of the stock FMR, LLC (14.86%) and Blue Harbour Group, LP (9.81%).

Diluted TTM earnings per share at 6.35, and a MRQ book value per share value at 51.89, implies a Graham Number fair value = sqrt(22.5*6.35*51.89) = $86.10. 

Based on the stock's price at $67.6, this implies a potential upside of 27.37% from current levels. 

PEG: 0.85

 

 

( List compiled by Emily Smykal. Analyst ratings sourced from Zacks Investment Research, institutional data sourced from Fidelity, EPS and BVPS data sourced from Yahoo! Finance, all other data sourced from Finviz.)

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