Stocks: Value Times Four

This week, S&P scours its database for stocks that score well according to four different valuation metrics

by Michael Kaye, CFA From Standard & Poor's Equity Research

With major stock indexes marching higher—the Dow Jones industrial average, having blown past the 13,000 milestone, is in record territory, and the Standard & Poor's 500-stock index is only 1.7% away from its all-time high of 1527—it's time to reassess equity valuations. The S&P 500, a broad benchmark for large-cap stocks, now trades at 18.35 times its 12-month trailing earnings, as of May 2.

Is it still possible to identify stocks that are relatively cheap? We will take a shot in this week's screen.

This time around, we wanted to use not one but four filters to identify stocks trading at attractive valuations. This week's screen searched for stocks that are in the lowest 20% in terms of three valuation metrics:

1. Price-to-sales

2. Price-to-book value

3. Price-to-earnings based on estimated EPS for the next 12 months

The lower the ratio for these three metrics, the better the value.

Then we turned to one of our proprietary measures, S&P's Fair Value model, a 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, 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 stock has at least a $5 per share price, and a $500 million market cap.

When the screen was finished, four names emerged.

Kaye, an analyst for Standard & Poor's Portfolio Services, is the author of The Standard & Poor's Guide to Selecting Stocks.