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As part of an ongoing series, each week we focus on one of the stocks on our stock screeners, and discuss how it could be a deeply undervalued gem. The stock this week is:

Ardmore Shipping Corp (ASC)

Ardmore Shipping Corp provides seaborne transportation of petroleum products and chemicals worldwide to oil majors, national oil companies, oil and chemical traders, and chemical companies, with its modern, fuel-efficient fleet of mid-size product and chemical tankers. The company operates its business in one operating segment: the transportation of refined petroleum products and chemicals.

The share price history over the past twelve months (as shown below) illustrates how the price has moved down around 35%.

Image Source: Google Finance

This week’s small and micro-cap stock screen highlights a diverse range of industries, spanning energy, finance, retail, healthcare, technology, and industrials. Key takeaways from the composition of stocks in this screen include:

• Sector distribution: The list includes a significant presence of energy-related companies, including fossil fuel exploration, downstream energy, and support activities for oil and gas. Financial services, including specialty finance, investment services, and real estate investment trusts (REITs), also have a strong representation. Healthcare and biopharmaceutical stocks contribute meaningfully, with companies engaged in medical devices, pharmaceuticals, and healthcare services. Retail and consumer discretionary stocks, including apparel, home furnishings, and entertainment retail, add further diversification.

One of the metrics we use in our screens is the IV/P (Intrinsic Value to Price). Let us simplify what that means. IV/P (Intrinsic Value to Price) tells you if a stock is a good deal or not based on how much value you’re getting for the price you pay. Here’s how it works:

• The calculation: It adds up the stock’s ability to make money (earning power), grow (incremental growth), and pay back investors (shareholder yield). This gives you an idea of what the stock is really worth, called its implied value.
• The meaning of IV/P: If IV/P is greater than 1, it means you’re getting more value than you’re paying for. For example, for every $1 you invest, you’re getting more than $1 of value. That’s a good deal. If IV/P is less than 1, it means you’re getting less value than you’re paying for. For example, for every $1 you invest, you’re getting less than $1 of value. That might not be a great deal.
• What it’s used for: It’s a quick way to spot undervalued stocks (good deals). If IV/P is very low, like 0.6 (you’re only getting 60 cents of value for $1), it’s likely overpriced. It's important to note that this is just an estimate. Other factors, like market trends or company issues, can affect how accurate this is.

So, IV/P helps investors find stocks that are “cheap” based on how much value they give back. Higher is usually better.

We have an IV/P of 2.60 for Ardmore Shipping Corp, which means that the stock’s implied value is calculated to be 2.60 times greater than its recent price. In simpler terms:

• For every $1 you invest, you’re potentially getting $2.60 of value.
• This is an extremely high ratio, which could imply that the stock is deeply undervalued, or that there’s some mispricing or unusual calculation in the data.

Possible Reasons for This Undervaluation

There are several macroeconomic factors that suggest the stock may be undervalued. Such factors include the following:

• Global oil trade disruptions: Recent U.S. sanctions on Russian oil exports have led to significant shifts in global oil trade, increasing demand for alternative shipping routes and vessels. This has resulted in higher freight rates, particularly benefiting tanker operators like Ardmore.
• Fleet dynamics and supply constraints: The tanker industry is experiencing limited fleet growth, with a historically low order book and an aging fleet. This supply constraint, coupled with steady demand, supports higher charter rates, potentially enhancing Ardmore’s revenue prospects.
• Geopolitical tensions and trade realignments: Ongoing geopolitical tensions, including trade policy shifts under the current U.S. administration, have led to changes in global trade patterns. These disruptions could create opportunities for tanker companies as oil trade routes adjust, potentially increasing demand for Ardmore’s services.

The company maintains an Acquirer’s Multiple of 3.49, with a dividend yield of 13.76, a five-year ROA of 18.20%, and a FCF yield of 23%.

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