Analyst target prices can be very useful guides for investors. The target price is a price level set by analysts that, based on their data and estimates, represents their predictions for that company in the upcoming year.
When a company's current market price is deeply lagging to the target price, it may signal that the company has more value to price in (meaning, the stock price may rise).
We wanted to explore this idea by forming a universe of companies that are currently undervalued to target price. And because analysts often have different opinions, and tend to be overly optimistic, we use the lowest analyst target price.
Large cash cushions
To narrow down the list of undervalued companies we looked for companies with enough cash to cover several quarters of operating expenses. After all, large cash holdings implies a company is better prepared to weather shifts in the market or even a more severe finical storm that would cripple them otherwise.
For our list we took only the companies with cash holdings that exceed 4 times the average quarterly operating expense. In other words, all of these companies could operate for more than four quarters without generating any revenue.
Do you think these undervalued stocks can withstand market volatility? Do you think they have the potential to reach their target price?
Use this list as a starting-off point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Ariad Pharmaceuticals
2. Achillion Pharmaceuticals
4. Pacific Biosciences of California
5. MAP Pharmaceuticals
6. Iconix Brand Group
9. ZIOPHARM Oncology
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above."