By Michael Kaye, CFA The stocks that carry Standard & Poor's highest investment ranking, 5 STARS (buy), are so designated because our equity analysts believe they have the highest potential to outperform the broader market over the next 6 months to 12 months. But of the 97 stocks with the 5-STARS ranking, which could see the greatest pop?
That's where another S&P investing metric, the 12-month target price, comes in. S&P's 12-month target prices are based principally on a blend of the values derived from using three analytical "bottom-up" approaches:
Intrinsic value: This is based on such resources as S&P's
discounted free-cash-flow model or other quantitative tools
Relative valuation: This compares a stock's valuation to that of its peers and the broader market
Sum-of-the-parts: A measure of a stock's private market value, based on a prospective breakup of the company.
In this week's screen, we started with the list of 5-STARS stocks. Then we looked for those with the largest percentage difference -- at least 40% -- between the current price (as of Nov. 30, 2003) and the S&P 12-month target price.
Here are the nine names that emerged:
Stocks with strong upside potential
S&P STARS Rank
America West Holdings (AWA)
Analog Devices (ADI)
La Quinta (LQI)
Reliant Resources (RRI)
Texas Instruments (TXN)
Kaye is a portfolio services analyst for Standard & Poor's