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 used the lowest analyst target price.
Graham Number
We also wanted to add the perspective of respected investor Benjamin Graham. Graham was a mentor to Warren Buffett, whom he taught at Columbia Business School. Graham is also considered to be the "godfather of value investing."
Graham created an equation to help search for potentially undervalued stocks, and identifies what is known as the "Graham Number," or the maximum fair value for a stock. Any stock trading at a significant discount to this number is considered by the equation to be undervalued.
The Graham Number only requires two data points: current earnings per share and current book value per share. The Graham Number = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share). This equation assumes that a stock is overvalued if P/E is over 15 or P/BV is over 1.5.
The list
To create the list below we narrowed down a universe of stocks to those with significant discounts to analyst target price. Then we applied the Graham equation and took only the names deemed most undervalued.
Without further ado, here are the top eight stocks, sorted by potential upside to target price, listed with relevant information. Do you think these stocks are truly undervalued? Analysts seem to think so...
Use the list below as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. Timken Co. (NYSE: TKR ) : Develops, manufactures, markets, and sells anti-friction bearings and related products and steel products primarily in the United States and Europe. Of the 8 analysts that research the stock, the lowest target price stands at 52, which implies a potential upside of 34.16% from current levels around 38.76. Diluted TTM earnings per share at 4.39, and a MRQ book value per share value at 22.58, implies a Graham Number fair value = sqrt(22.5*4.39*22.58) = $47.23. Based on the stock's price at $38.76, this implies a potential upside of 21.84% from current levels.
2. Titan Machinery (Nasdaq: TITN ) : Operates a network of full service agricultural and construction equipment stores in the United States. Of the 5 analysts that research the stock, the lowest target price stands at 29, which implies a potential upside of 33.15% from current levels around 21.78. Diluted TTM earnings per share at 1.87, and a MRQ book value per share value at 15.43, implies a Graham Number fair value = sqrt(22.5*1.87*15.43) = $25.48. Based on the stock's price at $21.78, this implies a potential upside of 16.99% from current levels.
3. The GEO Group (NYSE: GEO ) : Provides government-outsourced services specializing in the management of correctional, detention, and mental health and residential treatment facilities in the United States, Australia, South Africa, and the United Kingdom. Of the 7 analysts that research the stock, the lowest target price stands at 22, which implies a potential upside of 30.56% from current levels around 16.85. Diluted TTM earnings per share at 1.3, and a MRQ book value per share value at 16.57, implies a Graham Number fair value = sqrt(22.5*1.3*16.57) = $22.02. Based on the stock's price at $16.85, this implies a potential upside of 30.65% from current levels.
4. Warren Resources (Nasdaq: WRES ) : Engages in the exploration, development, and production of onshore crude oil and gas reserves in the United States. Of the 5 analysts that research the stock, the lowest target price stands at 4, which implies a potential upside of 27.80% from current levels around 3.13. Diluted TTM earnings per share at 0.27, and a MRQ book value per share value at 2.41, implies a Graham Number fair value = sqrt(22.5*0.27*2.41) = $3.83. Based on the stock's price at $3.13, this implies a potential upside of 22.25% from current levels.
5. Stone Energy Corp. (NYSE: SGY ) : Engages in the acquisition, exploration, exploitation, development, and operation of oil and gas properties located in the Gulf of Mexico and Appalachia region. Of the 10 analysts that research the stock, the lowest target price stands at 33, which implies a potential upside of 27.46% from current levels around 25.89. Diluted TTM earnings per share at 3.53, and a MRQ book value per share value at 13.81, implies a Graham Number fair value = sqrt(22.5*3.53*13.81) = $33.12. Based on the stock's price at $25.89, this implies a potential upside of 27.92% from current levels.
6. NII Holdings (Nasdaq: NIHD ) : Provides wireless communication services to businesses and individuals primarily in Mexico, Brazil, Argentina, Peru, and Chile. Of the 16 analysts that research the stock, the lowest target price stands at 27, which implies a potential upside of 26.82% from current levels around 21.29. Diluted TTM earnings per share at 1.77, and a MRQ book value per share value at 18.83, implies a Graham Number fair value = sqrt(22.5*1.77*18.83) = $27.38. Based on the stock's price at $21.29, this implies a potential upside of 28.63% from current levels.
7. KBR (NYSE: KBR ) : Operates as an engineering, construction, and services company supporting the energy, hydrocarbon, government services, minerals, civil infrastructure, power, and industrial sectors worldwide. Of the 13 analysts that research the stock, the lowest target price stands at 35, which implies a potential upside of 23.11% from current levels around 28.43. Diluted TTM earnings per share at 3.06, and a MRQ book value per share value at 16.98, implies a Graham Number fair value = sqrt(22.5*3.06*16.98) = $34.19. Based on the stock's price at $28.43, this implies a potential upside of 20.27% from current levels.
8. Denbury Resources (NYSE: DNR ) : Engages in the acquisition, exploitation, drilling, and extraction of oil and natural gas properties in the Gulf Coast region located in Mississippi, Texas, Louisiana, and Alabama. Of the 15 analysts that research the stock, the lowest target price stands at 18, which implies a potential upside of 16.50% from current levels around 15.45. Diluted TTM earnings per share at 1.32, and a MRQ book value per share value at 12.37, implies a Graham Number fair value = sqrt(22.5*1.32*12.37) = $19.17. Based on the stock's price at $15.45, this implies a potential upside of 24.06% from current levels.
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. List compiled by Eben Esterhuizen, CFA.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Data sourced from Finviz.
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