Have you ever been shopping and found one of your favorite items marked down to a price you couldn’t pass up? 

#-ad_banner-#Then you know how value investors feel when they spot a small-cap stock with double-digit growth expectations trading well below its intrinsic value. 

Investment guru Peter Lynch famously coined the phrase “10-bagger,” referring to an investment that returned 10 times its initial purchase price, by using a specific methodology to identify undervalued stocks. From 1977 to 1990, his flagship company, the Magellan Fund, netted average annual returns of 29.2% using his innovative investment formula. 

The criteria for finding a deeply undervalued stock are simple. It should have a price-to-earnings (P/E) ratio below the averages for its industry and the broader market. Its projected five-year growth in earnings per share (EPS) should be high, but less than 50% to weed out unsustainable growth. Finally, the stock shouldn’t have a debt load that could prevent it from growing. 

PC Connection (Nasdaq: PCCC) meets all Lynch’s criteria for value. It has a current P/E of 14.5, under the industry average of 15.4 and well under the S&P 500 average of 19.3. EPS growth forecasts for the next five years is around 32%, and PC Connection has no long-term debt on its balance sheet: Total liabilities total just $163 million while current assets stand at $408 million. 

PC Connection is an IT solutions provider for businesses and government with more than 300,000 brand name products available. With a market cap of $530 million and sales of $2.2 billion over the past 12 months, PCCC also boasts a price-to-sales ratio of 0.23. 

Technology is the backbone of every type of business on the planet. IT needs are growing daily as new fields like data analytics become a necessity for companies to stay competitive. The ability to process and store data not only drives the future of information technology, it will soon drive all industry.

A report by EMC estimates that the digital universe will be 300 times what it is today by the end of the decade. By 2020, global data will reach 40 trillion gigabytes. It’s clear that storing and servicing such a vast amount of information will be of paramount importance going into the next decade. 

PC Connection is a company well-suited to meet these growing needs. Its first-quarter earnings were encouraging: Net sales increased 10.8% year over year, led by a 26% increase in the public sector. A global partnership with European IT company Bechtle should expand both companies’ e-commerce segments and expand both customer bases to international markets. 

PCCC doesn’t yet pay a dividend, but cash flows are improving, and management is reinvesting into a new share repurchase program worth $15 million. PC Connection’s biggest competitor, CDW (Nasdaq: CDW) pays a small dividend yield of 0.6%, but trades at a much higher multiple at 32.9 times earnings. 

While PCC is up about 28% over the past 12 months, it doesn’t appear to be overbought, judging from its middle-of-the-road relative strength index (RSI) of 45:

Risks to Consider: PC Connection’s growth estimates are dependent upon growth in the U.S. economy and a continuing trend of liquidity to finance small-business applications. A pullback in small-business growth could impact future earnings and margins.

Action to Take –> PCCC is trading at a P/E-to-growth (PEG) ratio of 0.45, indicating it’s a strong bargain at current levels. If its P/E increased to the industry average, it would be trading at $25, making it an undervalued by about 25%.

The only thing better than investing in high-quality companies like PC Connection is investing in high-quality companies that return money directly to shareholders. In our latest research, we’ve found 13 market-dominating companies that have been hoarding billions in cash since the financial crisis — and they’re set to pay out $39.5 billion in dividends in 2014 alone. To get access to the names and ticker symbols of some of these companies, simply view this special report.