4 Undervalued Small Cap Stocks For Value Investors - July 2018

Benjamin Clark  |

There are a number of great companies in the market today. By using the ModernGraham Valuation Model, I've screened the 900+ companies reviewed by ModernGraham to select four small cap undervalued companies for value investors.

Each company has been determined to be suitable for the Enterprising Investor according to the ModernGraham approach. Defensive Investors are defined as investors who need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk.

Lucara Diamond Corp (TSE:LUC)

Lucara Diamond Corp  (LUC:CA) is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability or growth over the last ten years, and the poor dividend history. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $0.08 in 2014 to an estimated $0.22 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.98% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Lucara Diamond Corp revealed the company was trading above its Graham Number of $1.96. The company pays a dividend of $0.1 per share, for a yield of 4.3%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share - ModernGraham) was 10.45, which was below the industry average of 42.77, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-0.03. (See the full valuation)

GameStop Corp. (GME)

GameStop Corp.  (GME) is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, insufficient earnings stability or growth over the last ten years, and the poor dividend history. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.03 in 2015 to an estimated $2.45 for 2019. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.3% annual earnings loss over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into GameStop Corp. revealed the company was trading below its Graham Number of $37.34. The company pays a dividend of $1.52 per share, for a yield of 10.5%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share - ModernGraham) was 5.91, which was below the industry average of 37.1, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-2.68. (See the full valuation)

Kraton Corp (KRA)

Kraton Corp  (KRA) does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability over the last ten years, and the poor dividend history. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $0.5 in 2014 to an estimated $2.58 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 4.62% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Kraton Corp revealed the company was trading above its Graham Number of $38.96. The company does not pay a dividend. Its PEmg (price over earnings per share - ModernGraham) was 17.74, which was below the industry average of 31.55, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-49.66. (See the full valuation)

Centerra Gold Inc. (TSE:CG)

Centerra Gold Inc.  (CG:CA) does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability or growth over the last ten years, and the poor dividend history. The Enterprising Investor has concerns regarding the lack of earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $0.3 in 2014 to an estimated $0.42 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 2.81% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Centerra Gold Inc. revealed the company was trading above its Graham Number of $0. The company does not pay a dividend. Its PEmg (price over earnings per share - ModernGraham) was 14.12, which was below the industry average of 46.07, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-0.2. (See the full valuation)

What do you think? Are these companies a good value for Defensive Investors? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer. This article first appeared on ModernGraham.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
KRA Kraton Corporation 46.42 0.14 0.30 166,978 Trade
CG:CA Centerra Gold Inc. 5.74 0.03 0.53 696,243
GME Gamestop Corporation 16.49 0.64 4.04 5,193,303 Trade
LUC:CA Lucara Diamond Corp. 2.18 0.00 0.00 157,869

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