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.

Click on the interactive chart to view market capitalization over time.

Do you see any undervalued stocks in this bull market? Use the list below to begin your own analysis. 

1. Astro-Med Inc. ( ALOT): Designs, develops, manufactures, distributes, and services various products that acquire, store, analyze, and present data in multiple formats. Market cap at $98M, most recent closing price at $13.14.

Calculating the Graham Number:

Diluted TTM earnings per share at 1.22, and a MRQ book value per share value at 8.52, implies a Graham Number fair value = sqrt(22.5*1.22*8.52) = $15.29.

Based on the stock's price at $12.65, this implies a potential upside of 20.89% from current levels. 

Inventory trends

Revenue grew by 17.26% during the most recent quarter ($17.19M vs. $14.66M y/y).

Inventory grew by -10.32% during the same time period ($12.51M vs. $13.95M y/y).

Inventory, as a percentage of current assets, decreased from 26.99% to 18.82% during the most recent quarter (comparing 3 months ending 2013-08-03 to 3 months ending 2012-07-28).
 

 

2. Atwood Oceanics, Inc. ( ATW): Engages in offshore drilling, and the completion of exploratory and developmental oil and gas wells. Market cap at $3.74B, most recent closing price at $57.55.

Calculating the Graham Number

Diluted TTM earnings per share at 5.2, and a MRQ book value per share value at 32.82, implies a Graham Number fair value = sqrt(22.5*5.2*32.82) = $61.97.

Based on the stock's price at $52.07, this implies a potential upside of 19.01% from current levels.

Inventory trends

Revenue grew by 52.68% during the most recent quarter ($272.69M vs. $178.6M y/y).

Inventory grew by 38.41% during the same time period ($100.83M vs. $72.85M y/y).

Inventory, as a percentage of current assets, decreased from 29.07% to 18.92% during the most recent quarter (comparing 3 months ending 2013-06-30 to 3 months ending 2012-06-30).
 

 

3. Exterran Holdings, Inc. ( EXH): Provides operations, maintenance, service, and equipment for oil and natural gas industry. Market cap at $2.16B, most recent closing price at $32.81.

Calculating the Graham Number

Diluted TTM earnings per share at 2.58, and a MRQ book value per share value at 24.73, implies a Graham Number fair value = sqrt(22.5*2.58*24.73) = $37.89.

Based on the stock's price at $28.71, this implies a potential upside of 31.97% from current levels.

Revenue trends

Revenue grew by 32.76% during the most recent quarter ($837.34M vs. $630.74M y/y).

Inventory grew by 10.06% during the same time period ($455.69M vs. $414.04M y/y).

Inventory, as a percentage of current assets, decreased from 33.63% to 33.52% during the most recent quarter (comparing 3 months ending 2013-06-30 to 3 months ending 2012-06-30).
 

 

4. Lifetime Brands, Inc. ( LCUT): Engages in the design, marketing, and distribution of kitchenware, tabletop, and home decor products under various company-owned and licensed brand names in North America. Market cap at $174.75M, most recent closing price at $14.39.

Calculating the Graham Number

Diluted TTM earnings per share at 1.4, and a MRQ book value per share value at 13.31, implies a Graham Number fair value = sqrt(22.5*1.4*13.31) = $20.48.

Based on the stock's price at $15.39, this implies a potential upside of 33.05% from current levels.

Inventory trends

Revenue grew by 2.15% during the most recent quarter ($96.98M vs. $94.94M y/y).

Inventory grew by -7.05% during the same time period ($112.55M vs. $121.09M y/y).

Inventory, as a percentage of current assets, decreased from 63.78% to 61.42% during the most recent quarter (comparing 3 months ending 2013-06-30 to 3 months ending 2012-06-30). 
 

 

5. NL Industries Inc. ( NL): Operates in the component products industry in the United States, Canada, and Taiwan. Market cap at $554.36M, most recent closing price at $11.39.

Calculating the Graham Number

 Diluted TTM earnings per share at 1.06, and a MRQ book value per share value at 7.3, implies a Graham Number fair value = sqrt(22.5*1.06*7.3) = $13.19.

Based on the stock's price at $11.4, this implies a potential upside of 15.74% from current levels.

Inventory trends

Revenue grew by 8.53% during the most recent quarter ($24.04M vs. $22.15M y/y).

Inventory grew by -36.18% during the same time period ($12.26M vs. $19.21M y/y).

Inventory, as a percentage of current assets, decreased from 33.51% to 11.44% during the most recent quarter (comparing 3 months ending 2013-06-30 to 3 months ending 2012-06-30).
 

 

6. PHI Inc. ( PHII): Provides helicopter transportation services to the integrated energy, and independent exploration and production companies primarily in the Gulf of Mexico. Market cap at $591.14M, most recent closing price at $38.20.

Calculating the Graham Number

Diluted TTM earnings per share at 2.46, and a MRQ book value per share value at 34.12, implies a Graham Number fair value = sqrt(22.5*2.46*34.12) = $43.46.

Based on the stock's price at $37.35, this implies a potential upside of 16.35% from current levels. 

Inventory Trends

Revenue grew by 21.79% during the most recent quarter ($195.54M vs. $160.55M y/y).

Inventory grew by 8.76% during the same time period ($67.4M vs. $61.97M y/y).

Inventory, as a percentage of current assets, decreased from 17.35% to 16.19% during the most recent quarter (comparing 3 months ending 2013-06-30 to 3 months ending 2012-06-30). 

 

 

( List compiled by James Dennin, a Kapitall Writer. Analyst ratings sourced from Zacks Investment Research, all other data sourced from Finviz.)

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