To find the most undervalued stocks, Barronâ€™s screened the Russell 3000â€“a large universe of stocks that includes both small- and large-capitalization companiesâ€“to find stocks where the average analyst price target was significantly higher than where prices were recently trading.
To appear on the list, companies had to have at least half of the analysts covering them rate shares Buy. If a stock has no Buy ratings, that could be a signal that a stock is cheap for a reason.
Whatâ€™s more, the stocks that made our screen had to have at least 10 analysts covering the company. Thatâ€™s because the average isnâ€™t much of an average if there are only two or three analysts with price targets on a stock. Dow Jones Industrial Average stocks, for comparison, have about 30 analysts covering each of them.
Barronâ€™s also excluded biotechnology and commodity companies from the list. There are many small biotech companies without sales but have plans for new therapies that Wall Street analysts are optimistic about. That makes those stocks more volatile, often requiring a different, specialized approach. Similarly, commodity prices determine a significant part of the performance of commodity companies. This screen is designed to look for more typical businesses.
The two dozen stocks are quite a list and include, in no particular order: Amazon. com (ticker: AMZN); Facebook (FB); health insurers Centene (CNC), Cigna (CI), GoHealth (GOCO), Anthem (ATHM), Humana (HUM) and eHealth (EHTH); software providers Mimecast (MIME), JFrog (FROG), Tenable (TENB) and Datto (MSP); home insurers MGIC Investment (MTG), Essent (ESNT), NMI (NMIH) and Radian (RDN); power provider Vistra (VST); Dish Network (DISH); GoDaddy (GDDY); industrial Timken (TKR); information provider Dun & Bradstreet (DNB); grocer Albertson (ACI); automotive paint giant Axalta Coating Systems (AXTA); and World Wrestling Entertainment (WWE).
The average analyst price target of this group of 24 stocks implies gains of almost 30%. That compares with the 7% implied gain for the almost 900 stocks in the Russell 3000 with at least 50% of analysts rating shares Buy.
Valuation and recent stock performance for these 24 stocks vary, but the group trades for about 19 times estimated 2021 earnings. Thatâ€™s a discount to the S&P 500 multiple of about 22 times. The 24 stocks have underperformed the market over the past year, rising only about 1% on average. The S&P 500 is up about 18% over the past year.
On average, roughly 75% of the analysts covering a stock in this group rate shares Buy. The average Buy-rating ratio for all the stocks in the Russell 3000 with at least 10 analysts covering them is about 56%.
Analysts see potential in these 24 stocks but a screen is only a starting place for more research. Take a look into the two dozen and decide for yourself if you agree with analystsâ€™ price targets and if the stocks fit your investment style.
Write to Al Root at firstname.lastname@example.org