4 Undervalued Small Caps With Insider Buying


It is common knowledge that more risk has the possibility of yielding more reward, but it also brings a potentially larger downside. It is an investor's responsibility to produce returns while maintaining or reducing the risk taken.

A common way to do so is to search for potentially undervalued stocks, which are sometimes perceived as lower-risk investments. A popular valuation model is the price-to-earnings ratio, or P/E ratio, which calculates the current stock price divided by the earnings per share of the company. It shows how much you are paying for the earnings taken by the company.

The PEG ratio, or price-earnings growth ratio, shows the rate of growth of each of those compared to each other. If the price is rising faster than the earnings of the company, then the ratio will read over a 1, but if the earnings are growing faster than the stock price, it will read under a 1. If the PEG reads under a 1, then it can be considered undervalued. This ratio is often paired with the P/E ratio.

Additionally, investors like to have information on their stock before anyone else does (while maintaining legality) because it could affect the stock price. When information is unavailable, it's not a bad idea to look to the insiders of the company. They are the people who know the most about what is going on with a company, so it is common to follow the insider trades. If they're selling, it could mean that something is wrong, but if they're buying, then something big might be expected to happen.

Business section: Investing ideas
With that information in mind, we made a screen of small-cap companies that are undervalued according to the P/E ratio and PEG, then we checked those names' insider trading activity.

The stocks in this list have market caps from $300 million to $2 billion, P/E ratios under 15, PEGs under 1, and have net bullish insider trades over the last six months.

Do you think these undervalued stocks will be on the move soon?

List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)

1. Enstar Group (NAS: ESGR) : Through its subsidiaries, acquires and manages insurance and reinsurance companies in run-off. Market cap at $1.55B, most recent closing price at $93.75.P/E ratio at 8.70, PEG at 0.87. Over the last six months, insiders were net buyers of 134,824 shares, which represents about 1.36% of the company's 9.93M share float.

2. Newcastle Investment (NYS: NCT) : Operates as a real estate investment and finance company that invests in and manages a portfolio consisting primarily of real estate securities. Market cap at $822.97M, most recent closing price at $6.74.P/E ratio at 2.75, PEG at 0.92. Over the last six months, insiders were net buyers of 1,314,780 shares, which represents about 1.28% of the company's 102.62M share float.

3. Kraton Performance Polymers (NYS: KRA) : Through its subsidiary, Kraton Polymers LLC, produces styrenic block copolymers (SBC) for use in industrial and consumer applications worldwide. Market cap at $644.68M, most recent closing price at $21.02.P/E ratio at 8.02, PEG at 0.83. Over the last six months, insiders were net buyers of 957,100 shares, which represents about 3.49% of the company's 27.46M share float.

4. American Public Education (NAS: APEI) : Provides online higher education focused primarily on serving the military and public service communities. Market cap at $522.97M, most recent closing price at $29.56.P/E ratio at 12.85, PEG at 0.72. Over the last six months, insiders were net buyers of 283,600 shares, which represents about 1.68% of the company's 16.91M share float.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

Kapitall's Danny Guttridge does not own any of the shares mentioned above. Insider data sourced from Yahoo! Finance, all other data from Finviz.

At the time thisarticle was published The Motley Fool owns shares of American Public Education. Motley Fool newsletter services have recommended buying shares of American Public Education. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.