3 Cheap Stocks With Growth Potential

 | Aug 11, 2016 | 1:00 PM EDT
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Last night, an old friend called and asked about my columns the last two days. While he was in agreement with me that most blue chips were overvalued, he wondered what happened if we inverted the equation and looked for companies where analysts expected solid growth over the next few years but were trading at low EV/EBIT multiples. I decided this was a legitimate question and sat down to look for any potential high-expectation undervalued stocks.

It is, as expected, a very short list. Just eight companies are expected to grow at 15% or more on average over the next four to five years and still trade with a single-digit EV/EBIT ratio. Several of them are consumer-related companies and I just do not buy the outlook. I do not think Movado (MOV) is going to see a strong recovery over the next several years and it is not a stock I want to own. Ditto on GameStop (GME) , as I am not sure its current diversification program is going to pay off as hoped. I have never bought into the FitBit (FIT) craze and it has a lot of competition, so I suspect analyst hopes for the company are too high. Tilly's (TLYS) has never lived up to expectations, so I will pass on that one as well.

I am not sold on the future of for-profit educational and the student enrollment declines at American Public Education (APEI) , so I will pass on that one, too. I am intrigued by the concept of for-profit education, but so far no one has figured out the right business model.

That leaves three potential cheap growth stocks. I had never run across Super Micro Computer (SMCI) before and I have to say it is an intriguing company. It develops and sells what it calls green computing solutions to the data center, cloud computing, enterprise IT, big data and high-performance computing markets. I didn't realize there was a developing market for green computing products, but apparently there is. Energy costs are a big factor in large-scale data centers, and server products that use less energy can lower costs and increase profits for such cloud operations.

SMCI's approach is working as it has grown by about 25% a year for the past five years and is expected to grow by 15% annually for the next five. I must not be the only one who is not familiar with the company as the shares trade with an EV/EBIT ratio of just 7.1. This one is worth a deeper look.

Energy Focus (EFOI) is another interesting company that may have huge long-term potential. It's a leading provider of energy-efficient LED lighting products and a developer of energy-efficient lighting technology. Products include military maritime products, such as Military Intellitube, globe lights and berth lights, and it has a long-standing relationship providing these products to the U.S. Navy and allied navies. In addition to the Navy Energy Focus sells LED products to governments and commercial and industrial markets through direct-sales employees, independent sales representatives, electrical and lighting contractors and distributors. Growth is expected to accelerate from the trailing five-year annualized rate of 17.5% to 35% a year for the next five year. In spite of that, the stock is cheap and trades with an EV/EBIT ratio of just 6.3.

Heidrick & Struggles International (HSII) provides executive search and leadership consulting services on a retainer basis to companies around the world. It also has a fast-growing business called Culture Shaping that it says allows clients to create meaningful, measurable and lasting culture change to improve spirit and performance.

However that works, it's growing as that segment of the business grew revenues by 15.9% year over year in the second quarter. The company has grown by 16% a year for the past five years and is expected to continue growing at 15% annually for the next five as the global economic recovery slowly strengthens. The stock is cheap at current levels, trading with an EV/EBIT ratio of just 7.9. Heidrick shares also pay a dividend and the shares yield 2.78% at the current price.

These are not a lot of cheap potential growth stocks but they fit the bill and are worth further investigation.

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