In my weekly premium newsletter -- Undiscovered Micro-Cap Gems -- my goal is to introduce readers to a variety of promising undervalued investing ideas that they may wish to consider for their portfolios. In doing so, I generally look for small, neglected companies that have been overlooked by conventional Wall Street sources. I also look for undervalued firms that are trading at a steep discount to their intrinsic value. Many of these individual investment ideas have the potential to deliver triple-digit percentage gains in the years ahead.

Below you'll find an in-depth look at one such investing idea that I introduced my readers to in a recent issue. To gain access to dozens of similar investing ideas each and every week, you'll need to subscribe to my Undiscovered Micro-Cap Gems service. In the meantime, I sincerely hope you enjoy today's sneak peak at one of my most recent micro-cap investing ideas...

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Ecology & Environment (EEI, $7.70)
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Ecology & Environment is an environmental consulting and testing firm. The company, which has operations in more than thirty countries across the globe, operates in three business segments: consulting services, analytical laboratory services, and aquaculture. EEI provides a number of assessment and testing services, mostly for government agencies. Among other things, the firm conducts environmental impact assessments, tests wastewater, evaluates hazardous waste sites, and helps respond to spills of hazardous materials.

While I dislike the dual-class share structure of this stock (this is a topic I have mentioned in past newsletters), I believe that EEI still has much to offer. To begin, after giving back nearly one-fourth of their value over the past twelve months, the shares are now trading at a compellingly low valuation level. As the table below illustrates, the stock is attractively valued relative to its industry peers.

The market has placed a total value on the entire firm of around $30 million. This is not much more than its working capital of $26 million and is only three-fourths of its trailing annual gross profits of $40 million.

Furthermore, while many firms of this size struggle with their cash flows, EEI has generated sufficient cash to distribute 38 consecutive dividend payments, and has not missed a payment since becoming a publicly traded company. Currently, the firm pays out semi-annual dividends of $0.17 per share, which equates to a generous yield of more than 4.5% -- nearly double the industry average. Not only that, but the company has also produced enough cash to also fund a share repurchase program, spending $639,000 to buy back stock over the last year alone.

While I am slightly concerned by the fact that just a handful of insiders control nearly three-fourths of the outstanding shares, it's encouraging to see that insider activity has been generally positive over the past year. In fact, several executives have purchased a significant number of shares over the past few months near current prices.

Earlier this month, EEI was awarded a five-year, $20 million contract to provide environmental planning and engineering services for the Naval Facilities Engineering Command Atlantic in Norfolk, Virginia. In addition, just yesterday the firm announced that it would be awarded several government contracts to help with the cleanup efforts in the aftermath of Hurricane Katrina. While the stock initially bounced sharply higher on both of these news items, it has since relinquished most of those gains -- providing investors with a much safer entry point.  

For income-oriented investors looking for a defensive pick to round out their portfolios, EEI might be a solid choice. First, the fact that the company has been able to sustain uninterrupted dividend payments for so long underscores its ability to generate ample cash in both up and down markets.

Next, the firm maintains a stellar balance sheet, with more than $3.4 million in cash and a microscopic 0.01 debt/equity ratio. EEI also has a very healthy current ratio (a measure of its ability to meet short-term obligations) of 2.2 -- almost double the 1.2 of the S&P 500 and nearly triple the 0.8 of its average competitor.

Finally, the very low beta of 0.27 indicates the shares seldom move in lockstep with the broader markets, meaning they could hold up well even in a declining market. In fact, during the bear market of 2001, EEI posted an impressive +63.5% gain.

All things considered, EEI has the potential to deliver attractive total returns. Meanwhile, the 4.5% yield should help provide extra incentive to wait out a turnaround.

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Important Note: The above article was merely a small excerpt from a recent issue we sent to subscribers of our premium value investing service -- Margin-of-Safety Investing. In each issue of that newsletter, editors Nathan Slaughter and Paul Tracy deliver an in-depth look at a variety of other deeply discounted stocks that should provide investors with a solid margin of safety at current prices. To receive your copy of our most recent issue of Margin-of-Safety Investing, as well as other guidance similar to this twice per month, you'll need to subscribe to this publication. To learn more, please visit:
https://www.streetauthority.com/subscribe-msi.asp

Thanks for reading!

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