In addition to its research and investment opinions on nearly 1,500 individual U.S. stocks, Standard & Poor's Equity Research also performs extensive analysis on key equity-market sectors. For this week's screen, we thought we would take a "top-down" approach, using sectors as the starting point.
Standard & Poor's maintains recommendations on the 10 sectors in the S&P 1500 -- overweight, market weight, or underweight -- based on the weighting an investor should give each sector in his or her portfolio. Sector recommendations are market-cap weighted, influenced by economic, fundamental, and technical considerations. Currently, S&P has overweight recommendations on the Financial and Energy sectors, so we limited our candidates to the members of those groups.
We narrowed the list further by looking for individual equities favored by S&P equity analysts based on their potential for capital appreciation. We sifted for the issues with S&P's highest investment recommendation of 5 STARS (strong buy).
Next, we turned to S&P's Fair Value model, a proprietary quantitative stock-ranking system. The model calculates a stock's weekly Fair Value -- the price at which it should trade at current market levels -- based on fundamental data such as corporate earnings and growth potential, price-to-book value, return on equity, and current yield relative to the S&P 500. We filtered for those issues ranked "5," indicating these issues are significantly undervalued.
When we finished our search, these eight issues emerged: