Value investors look for stocks that they believe are trading below their "fair value" with the belief that they'll soon rise to that fair value, generating a profit for those investors savvy enough to foresee this happening. The catch is deciphering which stocks are indeed underpriced by the market.
Finding a stock's fair value
There are many ways to find a stock's fair value, but one of the simplest proxies is analyst target price. This reflects analyst expectations of where the stock is headed within the next year, and if a stock is trading at a steep discount to this number, it may be currently undervalued.
Because target prices are notoriously inflated, it helps to focus on the most pessimistic (the lowest) target prices, as well as those with sufficient analyst coverage of five or more analyst ratings.
We ran a stock screen to illustrate these ideas, focusing on stocks currently favored by the options market. We screened for stocks seeing significant decreases in put/call ratio over the last 10 trading days.
We screened these option market picks for those trading well below their most pessimistic (lowest) target prices, only focusing on stocks with five or more analyst ratings.
Do you think these stocks should be trading higher?
List sorted alphabetically. (Click here to access free, interactive tools to analyze these ideas.)
1. American Axle & Manufacturing Holdings
3. Finish Line
4. Halozyme Therapeutics
7. Mobile Telesystems
8. Noranda Aluminum Holding
9. WMS Industries
10. TAL Education Group
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 Alexander Crawford does not own any of the shares mentioned above. Target price data sourced from Thomson/First Call (via Yahoo! Finance), options data sourced from Schaeffer's.
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