Warren Buffett may best be known in the investment community for his success in value investing -- the concept of buying undervalued companies (or stocks) that eventually rise to their fair price, generating a profit. If you consider yourself a value investor, here are some ideas to get started.
In finding a proxy for fair value, one option is mean analyst target price. This is the price that analysts believe the stock will move to within the next year. Therefore, stocks trading at significant discounts to their target prices may be undervalued.
However because target price tends to be inflated due to analyst optimism, try using the lowest (most pessimistic) analyst target prices, and only of companies with sufficient analyst coverage of at least five ratings.
Levered free cash flow
Another way to find potentially undervalued stocks is by using the ratio levered free cash flow/enterprise value.
Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. Companies with high ratios of levered free cash flow/enterprise value may be undervalued by the market.
Business section: Investing ideas
To illustrate these ideas, we ran a screen for stocks trading at the most significant discounts to even their most pessimistic (lowest) target prices. We also screened for those with the highest ratios of levered free cash flow/enterprise value, also indicating that they may be undervalued.
Do you think the market is undervaluing these names? Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
2. Cliffs Natural Resources
3. Spirit Airlines: Provides passenger airline service primarily to leisure travelers and travelers visiting friends and relatives. Of the 6 analysts that research this stock, the lowest target price stands at 18, which implies an upside of 17.80% from current levels around 15.28. Levered free cash flow at $111.36M vs. enterprise value at $713.05M (implies a LFCF/EV ratio at 15.62%).
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. Data sourced from Yahoo! Finance.