In Search of "Deep Value"

According to the four most-used criteria and S&P's latest screen, Centex and Ryland Group make the grade

By Michael Kaye, CFA

Value investors look for stocks they believe the market has priced too low based on their intrinsic value -- the price they should fetch based on various investing yardsticks. How do investors determine that the market is valuing a stock below what it's really worth? Here are four widely used measures:

• Low price-to-earnings ratio based on estimated earnings for the current fiscal year;

• Low p-e based on historical earnings (the past 12-month period);

• Low price-to- book-value ratio; and

• Low price-to-sales ratio.

Where are the best bargains in the stock market right now? For this week's screen, we decided to look for "deep value" -- those stocks that are very undervalued based on all of the above criteria. So we looked for those issues in our database with forward p-e, historical p-e, price-to-book value, and price-to-sales ratios 50% lower than those of the Standard & Poor's 500-stock index.

And then we used one of our proprietary measures as the final filter. We looked for stocks with S&P Fair Value rankings of 3 (fairly valued), 4 (moderately undervalued), or 5 (significantly undervalued) under S&P's proprietary quantitative model.

When we crunched the data, these nine names emerged:

Company Ticker S&P Fair Value Rank
American Financial Group AFG 3
Beazer Homes USA BZH 5
Centex Corp. CTX 3
Dominion Homes DHOM 3
Hastings Entertainment HAST 5
Odyssey Re Holdings ORH 4
Ryland Group RYL 5
Standard Pacific SPF 3
Stewart Information Services STC 3

Kaye is an analyst for Standard & Poor's Portfolio Services

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