In Search of "Deep Value"
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|
|Odyssey Re Holdings||ORH||4|
|Stewart Information Services||STC||3|
Kaye is an analyst for Standard & Poor's Portfolio Services