If you want to increase your chances to discover bargains, one way to do so is to look for equities that are trading at a discount to their intrinsic value estimate as calculated from the projected free cash flow (FCF) valuation model.
Unlike the discounted cash flow or discounted earnings valuation models, the projected FCF model suits the need to ascertain the value of those companies whose record of revenue and earnings is not regular and may also incorporate losses in some quarters. The projected FCF uses normalized free cash flow and book value.
The following three stocks seem to be underestimated by the market according to the projected FCF model. They also hold positive recommendation ratings among sell-side analysts on Wall Street.
Liberty Global PLC
The first company that qualifies is Liberty Global PLC (LBTYA, Financial), a London, the United Kingdom-based provider of broadband internet and various telecommunications services to residential customers and businesses in the UK and internationally.
The stock was trading at around $26.49 per share at close on Friday, which represents a discount to the projected free cash flow of $80.14 per share. The share price has risen by 16.75% over the past year for a market capitalization of $14.84 billion and a 52-week range of $18.73 to $29.07.
GuruFocus has assigned a score of 3 out of 10 for the company's financial strength rating and of 5 out of 10 for its profitability rating.
Communication is a strategic sector in the UK and internationally. Guaranteeing a high level of security for the infrastructure is a matter of concern for many countries around the world, which raises the number of opportunities for the developers of communication service solutions. Moreover, with the progressive improvement of the networks, the connection cost will be increasingly accessible, providing a strong base for an ongoing expansion in the demand of the communication services sector.
As of July, the stock has a median recommendation rating of overweight and an average target price of $37.08 per share on Wall Street.
Plains GP Holdings LP
The second stock that makes the cut is Plains GP Holdings LP (PAGP, Financial). Based in Houston, the company is a crude oil and natural gas liquids midstream operator in North America.
The stock traded at around $11.63 per share at close on Friday, which represents a discount to the projected free cash flow of $36.72 per share. The price has risen by 42.52% over the past year for a market capitalization of $2.26 billion and a 52-week range of $5.45 to $12.95.
GuruFocus has assigned a score of 3 out of 10 for the company's financial strength rating and of 5 out of 10 for its profitability rating.
With the reopening of economies after the Covid-19 lockdowns, the demand for energy consumption will likely increase, contributing to a strong rise in the price of the commodity. This could lead to an improvement in profits for the owners of oil and gas pipelines and transporting activities.
On Wall Street, the stock has a median recommendation rating of overweight with an average target price of $12.71 per share.
Meta Financial Group Inc
The third stock that makes the cut is Meta Financial Group Inc (CASH, Financial), a Sioux Falls, South Dakota-based regional bank offering various banking products and services to U.S. individuals and businesses.
The stock traded at around $50.60 per share at close on Friday, representing a discount to the projected free cash flow of $99.76. The share price has increased by 707.7% over the past year, determining a market capitalization of $1.62 billion and a 52-week range of $17.13 to $54.65.
GuruFocus has assigned a score of 4 out of 10 for the company's financial strength rating and of 5 out of 10 for its profitability rating.
Small and large banks around the world are an essential part of economic growth. The profitability of the banking industry is not high at the moment due to record low interest rates, but as long as central banks eventually tighten monetary policy, their profits should grow again someday.
On Wall Street, the stock has a median recommendation rating of buy and an average price target of $57.25 per share.
Disclosure: I have no positions in any securities mentioned in this article.
