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.
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.
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.
2. Titan Machinery
3. The GEO Group
4. Warren Resources
5. Stone Energy Corp.
6. NII Holdings
8. Denbury Resources
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.