4 Undervalued Small-Cap Stocks for Value Investors - July 2018

ModernGraham valuation model reveals top picks

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Benjamin Clark
Jul 26, 2018
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There are a number of great companies in the market today. By using the ModernGraham valuation model, I've screened over 900 companies to select four undervalued small-cap 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. (

TSX:LUC, Financial)

Lucara Diamond 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 10 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 valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from 8 cents in 2014 to an estimated 22 cents for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.98% annual earnings growth over the next seven to 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 revealed the company was trading above its Graham Number of $1.96. The company pays a dividend of 10 cents per share, for a yield of 4.3%, putting it among the best dividend-paying stocks today. Its PEmg (price over earnings per share) was 10.45, 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 of -3 cents.

GameStop Corp. (

GME, Financial)

GameStop 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 10 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 should feel comfortable proceeding with the analysis.

As for valuation, the company appears to be undervalued after growing its EPSmg 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 seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.

At the time of valuation, further research into GameStop 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 was 5.91, 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 NCAV of $-2.68.

Kraton Corp. (

KRA, Financial)

Kraton 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 10 years and the poor dividend history. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, the lack of earnings stability over the last five years and the lack of dividends. As a result, all value investors should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for valuation, the company appears to be undervalued after growing its EPSmg from 50 cents 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 seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Kraton revealed the company was trading above its Graham Number of $38.96. The company does not pay a dividend. Its PEmg was 17.74, 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 NCAV of $-49.66.

Centerra Gold Inc. (

TSX:CG, Financial)

Centerra Gold 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 10 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 should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for valuation, the company appears to be undervalued after growing its EPSmg from 30 cents in 2014 to an estimated 42 cents for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 2.81% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Centerra Gold revealed the company was trading above its Graham Number of $0. The company does not pay a dividend. Its PEmg was 14.12, 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 NCAV of -20 cents.

Disclosure: 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. 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.

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Benjamin is one of TipRank's top bloggers. He is the founder of ModernGraham.com, a value investing website devoted to the study and modernization of the teachings of Benjamin Graham.