Markets & Finance

Stocks on the Expensive Side


Standard & Poor's latest list uses price and valuation filters to uncover 15 names that may be too rich for investors' blood

From Standard & Poor's Equity ResearchIt's early November, and that means holiday shopping season is getting under way. And just as you wouldn't want to pay more than you should for a plasma TV or a cashmere sweater when there are better, cheaper alternatives, you don't want to overpay for stocks. That was the thinking behind this week's screen.

Basically, we wanted to find stocks that had gotten ahead of themselves. We started by looking for issues that have enjoyed some recent success. We first searched our stock universe for issues that were trading within 5% of their 52-week highs. Then we turned to Standard & Poor's relative strength ranking, which shows, on a scale of 1 to 99, how a stock has performed compared with all other companies in S&P's universe on a rolling 13-week basis. We looked for those with a relative strength ranking in the highest 10% of the U.S. stock universe.

Next, we turned to a tried-and-true valuation measure. Each stock had to place in the highest 20% in our universe in terms of price-to-earnings based on S&P analysts' estimate for the company's current fiscal year.

Fair Value

Then we went deeper by consulting S&P's proprietary Fair Value ranking system. S&P's 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 with the Fair Value universe, to 1, indicating significant overvaluation. We looked for those issues ranked 1.

All the stocks had to trade above $5 per share and have a market capitalization of at least $500 million.

Fifteen stocks turned up. Given the steep increase in the price of gold, the screen returned many gold-related stocks.

Company

Ticker

Price (11/8/07)

BE Aerospace

BEAV

47.68

Covanta

CVA

27.23

Cypress Semiconductor

CY

38.65

Goldcorp

GG

35.82

HMS Holdings

HMSY

29.99

Inverness Medical Innovations

IMA

60.00

ITC Holdings

ITC

57.20

Quicksilver Res

KWK

54.69

Meridian Gold

MDG

38.97

Newmont Mining

NEM

54.06

Orient-Express Hotel

OEH

60.00

Ormat Technolofgies

ORA

52.20

Potash Corp. Saskatchewan

POT

124.34

Shaw Group

SGR

73.77

Meridian Bioscience

VIVO

31.61

Kaye, a chartered financial analyst, is an analyst for Standard Poor's Portfolio Services.

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