Amid the market's trepidation about the health of corporate profits—analysts expect the Standard & Poor's 500-stock index to post earnings growth of just 2.6% in the third quarter, according to Reuters Estimates, a figure that has been steadily downgraded in recent weeks—we decided to look for some good old-fashioned growth. Companies fall into the growth category when they are growing earnings and/or revenue faster than its industry or the overall market.
We took care of the outperformance part by screening for those stocks with both one-year (next year vs. this year) and five-year projected earnings-per-share growth rates in the highest 20% of our U.S. equity universe.
Great Growth—and a Great Value
But we didn't want to pay too much to get that growth. So we filtered that list for companies with attractive valuations using our Fair Value rankings. S&P's Fair Value model is a quantitative stock ranking system that 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, return on equity, current yield relative to the S&P 500, and price-to-book value.
Stocks are ranked from 5, indicating significant undervaluation compared to the Fair Value universe, to 1, indicating significant overvaluation. We looked for those issues ranked 5.
To avoid speculative issues, each issue had to have a per-share price of at least $5.00, and a market capitalization of at least $1 billion.
This was a tough one, as only four names turned up:
|Diamond Offshore Drilling (DO)||$116.30|
|JDS Uniphase (JDSU)||$15.64|
|NII Holding (NIHD)||$70.53|
|Tessera Technology (TSRA)||$37.88|