Outside of the world of Internet marketing, Hubspot is a little known company founded in 2006 by Brian Halligan and Dharmesh Shah. It is a pioneer in field of Inbound marketing, that is SEO, content management, social media marketing, videos and others. Started out of MIT, HUBS later received venture funding from Sequoia Capital, Google Ventures, Fidelity and SalesForce.

HubSpot is a software for companies and marketing agencies, which helps devise a low-cost, modern and aimed marketing strategy. According to the company, customers no longer respond to traditional advertisements (TV, newspaper, display ads) or e-mail campaigns, instead look for opinions on products or google or social media. Their site and blogs attract 1.5 million unique visitors every month, with more than 2 million followers across Facebook, Linkedin and Twitter. Basically, they do what they say and get most customers through inbound marketing. 

Their estimated market is 3 million businesses in USA and EU, which have a web presence, while only 3% of them rely on modern marketing methods. As such, it is only at the beginning although it has already become a standard in marketing agencies (over 2200 already use it). Although the software has scale, HubSpot focuses on small and medium sized businesses (20 - 2000 employees), where it believes it has a competitive advantage and can offer the best product. According to several software review sites, they are no.1 in SEO (Search engine optimization), marketing automation and social media marketing.

Let's take a look at some numbers:

I did a 3 stage DCF valuation of almost 3000 stocks using my model and these assumptions:

- For years 1-5 - Expected 5 year EPS growth rate or past 5 year sales growth, whichever is lower
- For years 6-10 - half of the mentioned rate
- discount rates of 8, 10, 12 and 14%

DCF calculations work best with companies that have stable cash flows. If a business is undergoing a rapid change, or it's earnings fluctuate every year, a DCF valuation will not be very reliable. With that said, here are some companies which are cheap, compared to their earnings or growth potential.

CLICK HERE TO DOWNLOAD THE FULL LIST OF UNDERVALUED / OVERVALUED STOCKS

Below are the most undervalued stocks, and their upside with a 14% discount rate:

Ticker                 Name                                                                Sector                             Upside                  P/E                      Market cap

I think there is no need to introduce Facebook. It is the largest social network in the world, with more than 1 billion active monthly users. Facebook, Inc. was founded in 2004 by Mark Zuckerberg, Eduardo Saverin, Andrew McCollum, Dustin Moskovitz and Chris Hughes and is headquartered in Menlo Park, California. On Facebook, users can post statuses, add friends, send messages, join groups, like posts or pages, play games and all other social stuff.

FB started with a bad IPO, after which the stock dropped almost 50%. However Facebook shares recovered and have been reaching all-time highs ever since.

Revenues have grown almost 10-fold in the past 5 years, while profits increased by 700%. Net income margin has gone down, but on the positive side, free cash flow shot up. For 2015, analyst are estimating EPS growth of 30% to 1.56 USD per share. For the next 5 years, Wall Street expects growth of 37%.

EPS estimates

Valuation

If I take the growth that analysts are expecting for the next 5 years, then take half of that for years 5-10 (18.5%) and assume a 2% discount rate, the Facebook's stock value is as follows:

Even after optimistic assumptions, FB stock doesn't offer that much upside. Of course a DCF valuation is only a rough guide, if Facebook can grow faster than everybody expects it's value is much higher. Compared to similar companies, only Twitter grew faster, Facebook is selling for P/S ratio of almost 20 and a 2015 forward P/E of 37.3.

So to summarize, Facebook looks reasonably valued at current levels and doesn't offer so much upside. Furthermore, the stock is sold heavily by insiders (almost 1 million shares in July alone) and the last buy was in August of 2012. It's a good company but I do not like the stock at these levels, so I decided not to buy it.

Michael Kors is  global luxury lifestyle brand led by a renowned and award-winning designer Michael Kors. The company has successfully expanded beyond apparel into accessories (including handbags, small leather goods, eyewear, jewelry and watches) and footwear, with a presence in 74 countries.

The company's sales and profits shot up like a rocket along with rising margins. In the recent year, they posted 51% growth in sales and a 66% rise in profits. The stock currently holds a Zacks Rank 2, and is known for positive earnings surprises. EPS estimates have increased from 3.82 90 days ago to 3.92 now. Analysts are predicting 24% EPS growth for the next 5 years.

Valuation

Using the 24% growth rate for valuation, with 12% for years 5-10, I arrived at the following value:

KORS appears to be reasonably valued at current levels. If it can achieve higher growth rates, it's definitely worth more, but I think it can't expand margins that much, so most of it will have to come from rising sales. Investors like Stephen Mandel and Joel Greenblatt still hold the stock. However, I am selling it today because KORS has broken several technical levels on the way down, and I never hold declining momentum stocks. If it resumes it's uptrend, I might be a buyer again, but right now I'm out.

I don't think I need to introduce Apple, it's one the most famous brands in the world. It produces iPads, iPods, Mac computers and of course the iPhone. It was founded in 1976 by Steve Jobs,  Steve Wozniak and Ronald Wayne. The company almost went bankrupt after the burst of the dotcom bubble in 2000s. With the introduction of iPhone, Apple quickly rebounded and became the giant it is today.

Valuation
I have done a three stage DCF valuation with these assumptions:
- 12% profit growth for the next 5 years, 6% for years 5-10 and 2% thereafter
- using the Capital asset pricing model, I arrived at a discount rate of 8.2%

As you can see, Apple is still undervalued with current growth assumptions. Even more so, if it comes up with a new blockbuster products. I believe I used conservative estimates to derive AAPL value, and there is still at least a 31% margin of safety. Hedge funds obviously realize this, and investors like Carl Icahn, Joel Greenblatt, David Einhorn and Daniel Loeb hold large positions in the stock.

I have created a three-stage DCF model to value more than 3000 stocks. The valuation was done with the following assumptions:

- Growth for the first 5 years - The lower of estimated  5-year growth rate or past 5-year sales growth rate
- Growth for the next 5 years - Half of the above mentioned rate
- Terminal growth rate of 2%
- Discount rates of 8%, 10%, 12%, 14%

The DCF valuation model is only feasible for companies with at least slightly predictable cash flow, it doesn't work  well in cyclical or biotechnology sectors, or for companies undergoing rapid change. As estimating a discount rate for each company is more art than science, I have used several discount rates to show potential undervaluation/overvaluation. Only companies with a profit this year, or estimated profit next year were valued. As I used a general formula for all stocks, there might be some extremes due to their growth rates/estimated profits.

DOWNLOAD THE VALUATION OF MORE THAN 3000 STOCKS

Below are some notable examples with upside/downside based on various discount rates (8,10,12,14):

Price to sales ratios are one of the best indicators to use, when looking for undervalued stocks. Sales are more stable than earnings, and you can actually find interesting businesses that are maybe currently losing money but undergoing restructuring. This is a lost of stocks with the lowest price to sales ratios right now (market cap > $2 billion): 

10. Sinopec

Sinopec Shanghai Petrochemical Company Limited, together with its subsidiaries, operates as a refining-chemical integrated petrochemical company primarily in the People's Republic of China. It operates in five segments: Synthetic Fibres, Resins and Plastics, Intermediate Petrochemicals, Petroleum Products, and Trading of Petrochemical Products.

Market cap: $4930 million
Price to Sales: 0.17
P/B: 1.13
Forward P/E: 8
Dividend yield: 1%
ROE: 13.3%
ROA: 6.2%
5-year sales growth: 12.2%
Short float: 0%

9. AmerisourceBergen Corporation

AmerisourceBergen Corporation sources and distributes pharmaceutical products to healthcare providers, pharmaceutical and biotech manufacturers, and specialty drug patients in the United States and internationally. 

Market cap: $16418 million
Price to Sales: 0.16
P/B: 7.8
Forward P/E: 17
Dividend yield: 1.3%
ROE: 19.3%
ROA: 2.3%
5-year sales growth: 4.6%
Short float: 3%

In December of 2013, I looked at the 30 best stocks of the year to see what they had in common. I was pretty curious how they have done since the start of the year, because I am an advocate of momentum investing. The results don't look good, their performance as a group has lagged the index for in 2014:

Baidu is the leading Chinese language internet search provider, through it's website Baidu.com. It is the largest website in China and fifth largest globally. The company captures 81.6% of internet search traffic in China and was voted number one out of the BrandZ top 50 most valuable Chinese brands. BIDU is basically a Chinese version of Google and a very successful one. It was founded in 2000 by Robin Li, now the wealthiest businessman in China. He used to work for Dow Jones & Company, where he developed search engine ranking algorithms (he received a U.S. patent for them), which served as a basis for Baidu.

The company makes money by selling advertising space to businesses and websites. The process is the same as with google: an advertiser bids for a certain keyword or ad space, and when a user searches for it, it gets displayed either at the top of the results or on a website the user visits. In addition to search, Baidu offers a range of other online products including: social-networking, UGC-based knowledge products, location-based products and services, entertainment, security products, mobile related products and services and specialized products and services for developers and webmasters.

China has in internet population of 600 million, and mobile internet population of 500 million. But with less then half the country connected, the penetration is far below developed countries. Baidu's video site Iqiyi already became number one, overtaking it's major rival Youku. The company also owns Qunar (QUNR) a major travel website and Nuomi, an online marketplace for entertainment, dining and health products. They also bought one of China's largest mobile game and app distribution companies, 91 Wireless.

Let's take a look at BIDU's financials:

I have decided to check the best stocks of 2014 so far, to see what I have missed this year. The minimum market cap criterion was $300 million, I also examined if they turned a profit or were bought by insiders prior to the big moves. Here are the best 30 stocks of 2014:

As you can see, 24 out of 30 top stocks (80%) didn't make any profit last year and most of them don't pay any dividend. So much for P/E ratios and dividend valuation models. In addition, 17 stocks (56%) were bought by insiders before their advance began. The most dominant sector was healthcare (or biotechnology) with 16 stocks, followed by basic materials (7).

However, there is one thing that all best stocks had in common: they kept making 52-week highs over and over during their big moves (simple, isn't it?), and some had huge increases in sales which justified the skyrocketing prices.

Palo Alto Networks is a cybersecurity company protecting enterprise, government and service provider customers. Their security platform  brings together all key network security functions, including advanced threat protection, firewall, IDS/IPS, and URL filtering. As such,  organizations can safely enable the use of all applications, maintain complete visibility and control and at the same time protect themselves from internal or external attacks.

The company has currently more than 17,000 customers in over 120 countries across multiple industries, including 70 of the Fortune 100 companies. IT research firm  Gartner ranked them a enterprise firewall market leader in 2011, 2012 and 2013 (published April 2014).

We sell our platform through a high touch, channel fulfilled sales model. Our business is geographically diversified, with 63% of our total revenue from the Americas, 23% from Europe, the Middle East, and Africa (EMEA), and 14% from Asia Pacific and Japan (APAC) in fiscal 2013. As of July 31, 2013, we had over 13,500 end-customers in more than 120 countries.

The company was fighting a long battle with rival Juniper Networks over infringement of it's patents, but that was settled in May for $175 million, in addition, both companies agreed not to sue each other for the next 8 years. The founder of PANW Nir Zuk, used to work at Juniper and of the pioneers in cybersecurity and firewall development,  a knowledge which he later used to create Palo Alto Networks.

They currently have only 4% of the firewall market, but have grown 50% in the recent quarter, outpacing all competition. It is estimated, that security leaks and attacks cost companies and governments over 400 billion USD annually. As a result, major security companies are jumping over one another to develop the best solutions for their clients. But Palo Alto Networks has already done it, and is far ahead of the crowd. As of 2013, they held 19 patents, with 55 additional applications expiring in years 2017-2029

Here is a snapshot of PANW 3 year financials:

Palo Alto has grown steadily over the years, with gross margins around 72%. The company has not achieved a profit during the last year, due to an increase in R&D and sales expenses of 62% and 73%.

VALUATION

The company is not expected to turn a profit next year, so I can only value it based on sales. They are currently trading at a P/S ratio of 11.7. However the company is growing by 50%, which would translate to a P/S of only 5.8. Their closest competitor Checkpoint Software (CHKP) trades at a ratio P/S of 9, but is growing a measly 5%, which is only a fraction of PANW growth.

I believe Palo Alto Networks has significant upside, based on their competitive advantage and future industry growth. Software companies like this usually achieve exploding profitability once they main R&D is over, after which they just collect service payments at no extra cost. 

1. Interactive Brokers

The undisputed leader in online trading, Interactive Brokers offers the best and cheapest solutions for investors and traders worldwide. Commissions get as low as $1 per trade, depending on the exchange and product you are trading. IB offers stocks, options, warrants, bonds, futures, forex, funds, etfs and many others, on exchanges in US , Europe (almost all countries), Asia (Japan, India, Hong Kong, Singapore, Korea) and South America. The catch is, that you need a minimum of 10 000 USD to open an account.

The company also offers master account solutions for hedge funds and advisors , through which they can manage their clients. I myself have an account with IB simply because they are the best and cheapest. I also manage some of my clients through here, as it offers a safe and convenient way for funds management.

2. Charles Schwab

Schwab is a relatively old company, which offers online trading for stocks, options, bonds and mutual funds. Their fees are sometimes higher, but you can open an account with as low as 1000 USD. The good thing is, that they also offer stock markets in Hong Kong, Japan, Canada, UK and the rest of Europe.

3. Saxo Bank

The Danish bank emerged as a leader for European retail investors, offering a lot of exchanges at affordable prices. You can trade all European and North American stocks, plus Singapore, Hong Kong, Australia, Tokyo. The company offers stocks, bonds, forex, futures, options, CFDs and funds. You also get lower commissions if you trade more frequently or deposit a large sum in the account.

4. Fidelity Investments

One of the largest investment companies in US, Fidelity has a wide range of products in nearly 25 countries and 16 currencies. You can trade stocks, funds, options and bonds in North America, Europe, Hong Kong, Japan, Singapore and South Africa. Fidelity is definitely one of the cheapest brokers out there, beaten only by Interactive Brokers.

Each broker has different commissions, and they might not accept customers from certian countries. So check individually before you open an account, to find the best one that suits you.

10. Terra Nitrogen

Terra Nitrogen Company, L.P. is engaged in the production and sale of nitrogen fertilizer products.

Market cap: $2.6 billion
Dividend yield: 8.54%
Payout ratio: 91%
P/E ratio: 10
P/S: 3.8

Insider buying is many times a good indicator if the future direction of a stock. After all, insiders know the most about their company and as such can usually estimate it's value. Let's take a look at biotech stocks bought by insider in the past year (min. market cap 300 million):

10. Incyte Corporation

Incyte Corporation, a biopharmaceutical company, focuses on the discovery, development, and commercialization of proprietary small molecule drugs primarily for oncology and inflammation.

Market Cap: $9.4 billion
Insider buying: 51.35%
Shares float: 150 million
Insider ownership: 0.8%
P/B: -

Agile Therapeutics is a specialty pharmaceutical company focused on the development and commercialization of new prescription contraceptive products.

Their product candidates are designed to provide women with contraceptive options that offer greater convenience and facilitate compliance. The lead product candidate, Twirla™, also known as AG200-15, is a once-weekly prescription 
contraceptive patch currently in Phase 3 clinical development. Twirla is based on a proprietary transdermal patch technology, called Skinfusion®, which is designed to provide advantages over currently available patches and is intendedto optimize patch adherence and patient acceptability.

An that's exactly what the buzz is about. Yesterday, the company announced a new patent for it's Skinfusion transdermal delivery service. The stock eventually closed up 35%.

The company went public in June, and has increased almost 100% since then. With a market cap of 192 million and share float of 18 million, the stock might still be a buy. Insiders have bought more than 5 million shares since it's IPO.

"The granting of this patent further strengthens the patent protection of our proprietary Skinfusion® transdermal technology used in our contraceptive patch, Twirla currently in Phase 3 clinical development," said Agile president and CEO Al Altomari. "The issuance of this patent demonstrates our commitment to protecting our intellectual property in our proprietary transdermal technology and is expected to provide protection into 2028."