Markets & Finance

Stocks Worth Twice the Price?


By Michael Kaye, CFA Searching for value plays amid a rising market? Standard & Poor's has developed a tool that may help investors identify such stocks. It's called the

Fair Value rankings. S&P's proprietary

quantitative model seeks to outperform the market by buying undervalued stocks and selling them when they reach maximum price appreciation.

The model calculates a stock's weekly fair value -- the price at which S&P believes an issue should trade at current market levels. The calculations are based on fundamental data such as earnings growth potential, price-to-book value, return on equity, and dividend yield relative to that of the S&P 500-stock index.

In addition to the fair-value price, each stock assessed under the model is ranked in one of five categories. Tier 5 is the highest ranking and contains stocks considered the most undervalued. These are issues with a fair value considerably greater than their current price, implying superior potential for price appreciation.

Stocks in the Tier 4 category are considered moderately undervalued, with fair value modestly higher than their current prices. Tier 3 includes stocks whose current prices most closely approximate their fair value. Tier 2 stocks are modestly overvalued, while the current prices of the stocks in Tier 1 substantially exceed their fair value.

DECENT FOLLOWING. The fair-value system has had a pretty good track record thus far in 2003. Year-to-date through Aug. 31, a portfolio of stocks with S&P's highest fair-value rankings was up 59%.

In this week's screen, we decided to search for issues that were trading at levels well below the fair value assigned by S&P's system. Using S&P's Stock Reports database, we looked for those issues with a fair value more than double the recent stock price.

While we didn't require that the stocks be followed by S&P analysts this time around, we did make sure each has at least three outside analysts covering it. Since an earnings component goes into the fair-value calculation, having at least three analysts covering the stock gives a better sample size for a consensus EPS estimate.

Our screen turned up these names, each of which carries a fair value ranking of 5:

Issues trading well below S&P Fair Value

Company name/ticker

Recent price (9/26/03)

S&P Fair Value (9/26/03)

Bally Total Fitness (BFT)

8.35

19.60

KB Home (KBH)

57.80

120.10

Neoforma (NEOF)

14.23

47.90

Orthodontic Centers of America (OCA)

7.88

18.60

Oxford Health Plans (OHP)

38.50

79.80

Triumph Group (TGI)

29.60

68.40

Kaye is a portfolio services analyst for Standard & Poor's


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