The best and worst values from the September 30th 2012 monthly report are examined here.
The undervalued list covers 21 stocks whose Sector representation is shown above. The list is dominated by Industrial, Technology & Consumer Cyclical stocks.
Example of the Undervalued: Harris Corp (HRS $51.22)
A good example of these stocks is Harris Corp. It had a Valuation Return (VR) of +45% based on normalized earnings (MPEPS) of $3.50 vs an estimate of $5.25 for 2013. This is illustrated in the following graph of Return on Equity (RoE).
Normalized earnings, expressed as RoE, are 10.9% ('M'). This is substantially below the estimated RoE,
but well above the earnings implied by the price of $2.77 (IEPS). The latter RoE is 8.7% ('I'), 210 basis points lower than normalized. Translated into growth (Reinvestment Return or RR), the normalized number is 7.6% whereas the implied RR is only 5.0%.
HRS has a history of trading at a premium to the market which has been consistent over the last two decades. Currently, at slight premium to the market Payback, it is cheap compared to its history.
For more details on these stocks -> The Undervalued short list 9/30/12
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The overvalued stocks are more numerous and have a broader Sector representation. They are also more concentrated in one Sector, namely the CONSUMER CYCLICAL (42%) due in part to 5 stocks in the Homebuilding industry.
A good example would be D R HORTON INC (DHI $20.63) which has outperformed the market by roughly 100% in the last 12 months. Its Valuation Risk (VR) is now -69% based on its normalized earnings for next year of $1.26.
The estimate is $0.90 but the implied earnings are $2.86. In terms of RoE, normalized earnings are 14.2% ('M') vs the implied 32.1% ('I').
That is just to break even at today's price.
For more details on these stocks -> The Overvalued short list 9/30/2012
A copy of the complete September report is available to institutional investors by emailing robertlcolby@gmail.com.
