Get in on rising demand for durable goods stocks with these 6 plays

James Dennin, Kapitall: Stocks are up on strong numbers for durable goods stocks, so we found 6 undervalued plays in the sector. 

The stock market is up this morning as positive data regarding the services and durable goods sectors outweighed  lackluster corporate investment and lingering concerns over Ukraine.

[Read more from Kapitall: What does Facebook want with a virtual reality company like Oculus?]

A number of analysts were surprised by the good news, pointing to a market that's been remarkably resilient in what is widely agreed to be a less-than-robust recovery.

The Fed's tapering program, which is largely attributed as the main cause of the S&P's record-breaking run in recent years and the terrible winter aren't hampering the economy as much as some investors previously thought. 

Investing Ideas

One of the strongest figures released this morning was the durable goods report, which surpassed expectations with demand rising more than 2%. 

Durable goods are consumer goods which you expect to own for at least two years. Automobiles are a fixture of the durable goods market, as are household goods and recreational products like boats or video games. 

Consequently, durable goods are an incredibly important barometer for economic activity. Investors use the durable goods reports to help them gauge everything from consumer spending to factory orders and how busy the economy will be. Since durable goods are expected to last a long time, these are purchases that are more easily put off when money is tight. 

We built a list using CNN Money's durable goods index of 160 stocks. We then narrowed that list to focus on companies that seem undervalued by looking at their levered-free-cash-flow to enterprise value ratio (LFCF/EV)

Levered free cash flow is all the cash a company has on hand after paying off costs and debts, and enterprise value is an alternative to the market cap for gauging a company's size. When a company has a high LCEF/EV ratio, it means that the company has a lot of extra cash on hand relative to its size.  This indicates that the stock has more flexibility, and might be undervalued.

We found 6 stocks that made it through our screen. 

Click on the interactive chart to view data over time. 

1. Briggs & Stratton Corp. ( BGG): Designs, manufactures, markets, and services air cooled gasoline engines for outdoor power equipment worldwide. Market cap at $1.06B, most recent closing price at $22.57.

Levered free cash flow at $150.38M vs. enterprise value at $1.17B (implies a LFCF/EV ratio at 12.85%).

 

2. Fuel Systems Solutions, Inc. ( FSYS): Engages in the design, manufacture, and supply of alternative fuel components and systems for use in the transportation, industrial, and power generation markets primarily in North America, Europe, Asia, the Pacific Rim, and Latin America. Market cap at $259.46M, most recent closing price at $12.92.

Levered free cash flow at $13.63M vs. enterprise value at $116.26M (implies a LFCF/EV ratio at 11.72%).  

 

3. China HGS Real Estate Inc. ( HGSH): Engages in the real estate development in the People's Republic of China. Market cap at $190.56M, most recent closing price at $4.23.

Levered free cash flow at $54.82M vs. enterprise value at $233.78M (implies a LFCF/EV ratio at 23.45%).  

 

4. Harbinger Group Inc. ( HRG): Operates as the holding company that focuses on acquiring interests in companies that operate in diverse range of industries. Market cap at $1.6B, most recent closing price at $11.50.

Levered free cash flow at $853.00M vs. enterprise value at $5.50B (implies a LFCF/EV ratio at 15.51%).

Owns Spectrum Brands which is the company's durable goods segment. 

 

5. 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 $208.9M, most recent closing price at $16.44.

Levered free cash flow at $35.99M vs. enterprise value at $301.19M (implies a LFCF/EV ratio at 11.95%).  

 

6. LS Starrett Co. ( SCX): Engages in the manufacture and sale of industrial, professional, and consumer products worldwide. Market cap at $129.23M, most recent closing price at $18.67.

Levered free cash flow at $18.62M vs. enterprise value at $108.80M (implies a LFCF/EV ratio at 17.11%).  

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

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