Stocks Worth Twice the Price?

This screen takes advantage of S&P's fair-value system to find six shares that have the potential to double

By Michael Kaye, CFA

Searching for value plays amid a rising market? Standard & Poor's has developed a tool that may help investors identify such stocks. It's called the Fair Value rankings. S&P's proprietary quantitative model seeks to outperform the market by buying undervalued stocks and selling them when they reach maximum price appreciation.

The model calculates a stock's weekly fair value -- the price at which S&P believes an issue should trade at current market levels. The calculations are based on fundamental data such as earnings growth potential, price-to-book value, return on equity, and dividend yield relative to that of the S&P 500-stock index.

In addition to the fair-value price, each stock assessed under the model is ranked in one of five categories. Tier 5 is the highest ranking and contains stocks considered the most undervalued. These are issues with a fair value considerably greater than their current price, implying superior potential for price appreciation.

Stocks in the Tier 4 category are considered moderately undervalued, with fair value modestly higher than their current prices. Tier 3 includes stocks whose current prices most closely approximate their fair value. Tier 2 stocks are modestly overvalued, while the current prices of the stocks in Tier 1 substantially exceed their fair value.

DECENT FOLLOWING.

  The fair-value system has had a pretty good track record thus far in 2003. Year-to-date through Aug. 31, a portfolio of stocks with S&P's highest fair-value rankings was up 59%.

In this week's screen, we decided to search for issues that were trading at levels well below the fair value assigned by S&P's system. Using S&P's Stock Reports database, we looked for those issues with a fair value more than double the recent stock price.

While we didn't require that the stocks be followed by S&P analysts this time around, we did make sure each has at least three outside analysts covering it. Since an earnings component goes into the fair-value calculation, having at least three analysts covering the stock gives a better sample size for a consensus EPS estimate.

Our screen turned up these names, each of which carries a fair value ranking of 5:

Issues trading well below S&P Fair Value
Company name/ticker Recent price (9/26/03) S&P Fair Value (9/26/03)
Bally Total Fitness (BFT ) 8.35 19.60
KB Home (KBH ) 57.80 120.10
Neoforma (NEOF ) 14.23 47.90
Orthodontic Centers of America (OCA ) 7.88 18.60
Oxford Health Plans (OHP ) 38.50 79.80
Triumph Group (TGI ) 29.60 68.40

Kaye is a portfolio services analyst for Standard & Poor's

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