With pricing data readily available from a number of sources, it's easy for investors to find out at what price a particular stock is trading. But what investors really want to know, of course, is this: Where should a stock be trading?
Standard & Poor's has developed a couple of approaches to address the eternal question, and we thought we'd employ them in this week's screen. Specifically, we looked for issues that are trading well below where they should, and therefore carry considerable upside potential.
We started with a list of stocks trading at sharp discounts to the 12-month target prices assigned by S&P equity analysts. These are the analyst's projection of the stock's market price 12 months forward. The target is based on a combination of intrinsic, relative, and proprietary market valuation metrics.
Then we turned to another tool to ensure that these issues were attractively valued. So we turned to our proprietary Fair Value model. This 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-stock index. Stocks are ranked from "5," indicating significant undervaluation, to "1," indicating significant overvaluation. We looked for those stocks ranked "5."
When we finished our screen, these five names—mostly members of the information-technology sector—turned up: