CARGURUS INC (NASDAQ:CARG): A Promising Undervalued Stock for Value Investors

Value investing is a method that looks for stocks trading below their true worth, providing a safety net for investors. One approach to finding these opportunities is by searching for companies with solid fundamentals, focusing on valuation, profitability, financial stability, and growth, while also ensuring the stock is priced well compared to similar companies. CARGURUS INC (NASDAQ:CARG) is an example that recently appeared in a "Decent Value" screen, which selects stocks with a valuation score above 7 while maintaining good profitability, stability, and growth measures.

Why Cargurus Is a Promising Undervalued Stock

1. Favorable Valuation

The key to value investing is discovering stocks priced below their true value. Cargurus earns a 7 out of 10 in ChartMill’s valuation score, showing it is priced better than many competitors. Key points from the fundamental analysis report include:

• A Price/Earnings (P/E) ratio of 16.88, lower than the industry average (29.85) and the S&P 500 (27.24).
• A Forward P/E of 12.22, indicating the market is pricing future earnings growth cautiously.
• An Enterprise Value/EBITDA ratio that is more affordable than 70% of its peers, highlighting its undervaluation.

For value investors, these metrics suggest Cargurus is trading at a reasonable, if not low, valuation, offering a potential opportunity before the market adjusts.

2. Stable Financial Position

A company’s financial strength is vital for enduring economic challenges and supporting long-term growth. Cargurus performs well here with a stability score of 9/10, supported by:

• No debt, removing interest costs and default concerns.
• A current ratio of 2.67 and a quick ratio of 2.66, showing strong liquidity to cover short-term needs.
• An Altman-Z score of 9.76, far above the safe level, indicating minimal bankruptcy risk.

These factors match value investing principles, where financially secure companies are preferred to avoid stocks that seem cheap but are fundamentally weak.

3. Consistent Profitability

Profitability ensures a company can deliver returns to shareholders. Cargurus has a profitability score of 7/10, backed by:

• A Return on Invested Capital (ROIC) of 18.93%, better than 88.57% of peers.
• An Operating Margin of 19.50%, placing it in the top 15% of its sector.
• Steady positive earnings and cash flow over the last five years.

High profitability relative to valuation is a sign of strong value candidates, as it implies the market may be underestimating the company’s earnings potential.

4. Growth Opportunities

While value investing often focuses on price over growth, a company with improving fundamentals can offer upside. Cargurus has a growth score of 6/10, with notable strengths:

• EPS growth of 43.85% YoY and a 26.69% annual growth rate in recent years.
• Expected future EPS growth of 29.13% per year, showing continued progress.
• Revenue growth, though slow, remains positive at 6.87% projected annually.

This growth profile suggests Cargurus isn’t just a static bargain but a business with rising earnings potential, a combination value investors often look for.

Conclusion

Cargurus makes a strong case as an undervalued stock, blending an appealing valuation with solid financial stability, profitability, and growth. For investors using a value strategy, these traits lower risk while leaving room for gains as the market acknowledges the company’s true value.

To find more stocks that meet this "Decent Value" criteria, you can use the same screen here.

Disclaimer: This article is not investment advice. Always do your own research or consult a financial advisor before making investment decisions.