Investing 101: Top 10 S&P 500 Companies Undervalued Relative to Cash Flows

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(List compiled by Alexander Crawford. Levered free cash flow and enterprise value data sourced from Yahoo! Finance, all other data sourced from Finviz.)

Many investors believe that stock prices are not perfect – that they don’t always reflect all public information. Therefore, those investors believe that stock prices may be higher or lower in the short term than their “fair value.”

Value investors are those that, in keeping with this idea, search for undervalued stocks. If a stock is priced lower than it should given its latest earnings report, for instance, you can reasonably expect that it will rise to its fair value sometime in the near future (as the information is eventually priced in).

Value investors hope to cash in on this rise in price by buying stocks that appear undervalued.

One way to find potentially undervalued stocks is to use the ratio of levered free cash flow/enterprise value. Don’t worry if this is unfamiliar, we’ll explain these terms and why we use them:

Levered free cash flow is a measure of incoming cash after subtracting interest payments that the company makes on their debt. This number reflects the capital structure of the company (i.e. the makeup of debt and equity that supplies financing).

Enterprise value is the sum of the firm’s value from all ownership sources: market cap, outstanding debt, and preferred shares. From this value we subtract cash holdings because, in the event of a takeover, that cash would be used towards the takeover price.

The ratio LFCF/EV can be used as an indicator for whether the firm as a whole is undervalued, given the amount of levered free cash flow it is generating. The higher the ratio, the more likely the company is undervalued.


To illustrate this, we ran a screen on the stocks of the S&P 500 index for those with relatively high ratios of levered free cash flow/enterprise value.


Do you think these companies are priced too low, given their cash flows? Use this list as a starting off point for your own analysis.

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List sorted by LFCF/EV.

1. Genworth Financial Inc. (GNW): Life Insurance Industry. Market cap of $3.15B. Levered free cash flow at $3.22B vs. enterprise value at $9.52B (LFCF/EV at 0.34). This is a risky stock that is significantly more volatile than the overall market (beta = 3.16). It's been a rough couple of days for the stock, losing 8.69% over the last week.

2. Lincoln National Corp. (LNC): Life Insurance Industry. Market cap of $6.91B. Levered free cash flow at $2.10B vs. enterprise value at $7.36B (LFCF/EV at 0.29). This is a risky stock that is significantly more volatile than the overall market (beta = 2.52). Might be undervalued at current levels, with a PEG ratio at 0.64, and P/FCF ratio at 4.1. It's been a rough couple of days for the stock, losing 6.23% over the last week.

3. The Travelers Companies, Inc. (TRV): Property & Casualty Insurance Industry. Market cap of $21.52B. Levered free cash flow at $6.13B vs. enterprise value at $22.89B (LFCF/EV at 0.27). The stock has performed poorly over the last month, losing 12.11%.

4. Prudential Financial, Inc. (PRU): Life Insurance Industry. Market cap of $25.18B. Levered free cash flow at $4.47B vs. enterprise value at $17.50B (LFCF/EV at 0.26). This is a risky stock that is significantly more volatile than the overall market (beta = 2.37). Might be undervalued at current levels, with a PEG ratio at 0.83, and P/FCF ratio at 2.93. It's been a rough couple of days for the stock, losing 5.75% over the last week.

5. Torchmark Corp. (TMK): Life Insurance Industry. Market cap of $4.16B. Levered free cash flow at $1.20B vs. enterprise value at $4.83B (LFCF/EV at 0.25). The stock has performed poorly over the last month, losing 12.72%.

6. Southwest Airlines Co. (LUV): Regional Airlines Industry. Market cap of $6.57B. Levered free cash flow at $1.61B vs. enterprise value at $6.52B (LFCF/EV at 0.25). It's been a rough couple of days for the stock, losing 6.22% over the last week.

7. Time Warner Inc. (TWX): Entertainment Industry. Market cap of $31.06B. Levered free cash flow at $9.61B vs. enterprise value at $46.08B (LFCF/EV at 0.21). Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.16%, current ratio at 1.65, and quick ratio at 1.4. It's been a rough couple of days for the stock, losing 7.15% over the last week.

8. CIGNA Corporation (CI): Health Care Plans Industry. Market cap of $11.57B. Levered free cash flow at $2.65B vs. enterprise value at $12.80B (LFCF/EV at 0.21). Might be undervalued at current levels, with a PEG ratio at 0.72, and P/FCF ratio at 9.79. It's been a rough couple of days for the stock, losing 5.87% over the last week.

9. Teradyne Inc. (TER): Semiconductor Equipment & Materials Industry. Market cap of $2.19B. Levered free cash flow at $275.15M vs. enterprise value at $1.44B (LFCF/EV at 0.19). Might be undervalued at current levels, with a PEG ratio at 0.82, and P/FCF ratio at 4.67. The stock is a short squeeze candidate, with a short float at 11.54% (equivalent to 5.71 days of average volume). The stock has performed poorly over the last month, losing 14.35%.

10. Agilent Technologies Inc. (A): Scientific & Technical Instruments Industry. Market cap of $12.01B. Levered free cash flow at $1.93B vs. enterprise value at $11.19B (LFCF/EV at 0.17). Might be undervalued at current levels, with a PEG ratio at 0.84, and P/FCF ratio at 14.92. It's been a rough couple of days for the stock, losing 6.5% over the last week.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


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