Growth and value are two of the most common characteristics investors look for in stocks. However, not all stocks that are undervalued are achieving enough growth for their share prices to appreciate, and not all stocks that are growing are doing so in a way that creates long-term value for shareholders.
That is why one of the metrics that is placed near the top on the GuruFocus summary pages for stocks is the ratio of weighted average cost of capital (WACC) compared to return on invested capital (ROIC). The WACC represents the costs incurred to raise capital for investments, while the ROIC represents the returns the company generates on that invested capital.
Shown below is the Financial Strength box for Walmart (WMT); the WACC vs. ROIC comparison is at the bottom of this box, and as we can see, Walmart’s ROIC is higher than its WACC, meaning the company is creating value for shareholders as it grows.
Searching for value creators that have the potential to see their share prices recover, I used the GuruFocus All-in-One Screener, a Premium feature, to screen for stocks with higher ROIC compared to WACC that have been bought by insiders recently. In this discussion, we will take a look at three of the stocks that made it through this screen and also appear undervalued based on GF Value.
Myers Industries
Myers Industries Inc. (MYE, Financial), a leading manufacturer of plastic, metal and rubber products, has been bought by four insiders over the past three months, including President and CEO Michael McGaugh. Its ROIC has trended higher than its WACC for the past few years, meaning it is creating value for shareholders.
The stock has become modestly undervalued based on its GF Value chart because the share price has not changed much despite high top- and bottom-line growth rates. Over the past three years, revenue per share has grown at an average clip of 19.1% per year, while earnings per share without non-recurring items growth has averaged 34.1% per year. The price-earnings ratio of 13.06 is significantly lower than the stock’s median historical price-earnings ratio of 24.78.
Myers Industries did report in its fourth-quarter 2022 earnings that it was seeing falling sales volume, and that price hikes could not keep up with inflation. These issues seem more related to the economic slowdown than the company itself, which is not surprising. Even though it has a diversified business model across many industries, Myers is still an industrial products manufacturer. Thus, it could be a promising watchlist candidate for an economic turnaround.
Air Transport Services Group
Air Transport Services Group Inc. (ATSG, Financial) is a holding company for aircraft leasing and air cargo transportation and services companies in the U.S. The stock has seen 15 insider buys over the past three months, including from Chief Financial Officer Quint O’Turner, though several insiders bought shares in two or more transactions. The company’s ROIC is higher than its WACC, though it is cutting it pretty close.
Air Transport’s price-earnings ratio of 9.02 is lower than both the industry median and its own historical median, despite a three-year earnings per share without NRI growth rate of 42.6%. However, the company’s revenue per share growth rate has been much slower for the past three years at just 3.4%. The GF Value chart rates the stock as modestly undervalued.
As the number one company in a profitable niche that few big players are keen on, Air Transport benefits from growing economies of scale and a solid brand reputation. The company’s main business is aircraft leasing; it takes medium wide-body and narrow-body passenger aircraft and converts them for freight, with its main customers being the U.S. Department of Defense (36% of 2022 revenue) and Amazon (AMZN, Financial) (21% of 2022 revenue). It has broad cross-selling opportunities still available via cargo and passenger airline operations, maintenance, repair, overhaul, ground support services, etc.
Akamai Technologies
Akamai Technologies Inc. (AKAM, Financial), a Massachusetts-based technology company operating a massively distributed edge and cloud platform, only had one insider buying shares over the past three months, but he bought his company’s stock a total of 24 times. That insider was the company’s CEO and co-founder, Frank Thomas Leighton. Akamai’s ROIC is consistently higher than its WACC, which implies strong long-term value creation.
According to the GF Value chart, Akamai is significantly undervalued. Its price-earnings ratio of 25.64 is consistent with the industry median but below the company’s own historical median price-earnings ratio. Revenue per share growth has averaged 8.6% over the past three years, though earnings per share without NRI growth has been more sluggish at a rate of 4%.
Akamai basically delivers, optimizes and provides cybersecurity solutions for sites and applications over the internet using the Akamai Edge Network, which is a content delivery network (CDN). A CDN improves the performance and security of a website by standing in place of a cloud or physical server. Akamai’s network has grown to over 365,000 servers in more than 135 countries around the world. Due to its global diversification, the company is in a good place to benefit from the growth of the internet in developing countries.
