Markets & Finance

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

Centex Corp.

CTX

3

Dominion Homes

DHOM

3

Hastings Entertainment

HAST

5

Odyssey Re Holdings

ORH

4

Ryland Group

RYL

5

Standard Pacific

SPF

3

Stewart Information Services

STC

3

Kaye is an analyst for Standard & Poor's Portfolio Services


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