In order to increase the likelihood of identifying bargains, screen the market for equities that are trading at a discount to their intrinsic value estimates as calculated from the projected free cash flow valuation model.
Unlike the discounted cash flow or discounted earnings valuation models, the projected FCF model allows investors to estimate 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 stocks seem to be undervaled by the market according to the projected FCF model. They also have positive recommendation ratings among sell-side analysts on Wall Street.
Vale
The first company that meets the criteria is Vale SA (VALE, Financial), a Brazilian producer and seller of iron ore and iron ore pellets to steel companies.
The stock closed at $13.55 per share on Tuesday, which represents a discount to the projected free cash flow of $25.94 per share. The share price has dropped 23.66% over the past year for a market capitalization of $67.45 billion and a 52-week range of $11.16 to $23.18.
GuruFocus has assigned a score of 5 out of 10 for the company's financial strength and 8 out of 10 for its profitability.
On Wall Street, the stock has a median recommendation rating of overweight with an average target price of $16.44 per share.
Radian Group
The second stock that makes the cut is Radian Group Inc. (RDN, Financial), a Philadelphia-based specialty insurer serving mortgage originators and lenders, mortgage investors, government-sponsored enterprises and real estate investors, brokers and agents.
The stock closed at around $21.43 per share on Tuesday, which represents a discount to the projected free cash flow of $45.74 per share. The price has risen 4.82% over the past year for a market capitalization of $3.91 billion and a 52-week range of $19.1 to $25.31.
GuruFocus has assigned a score of 4 out of 10 for the company's financial strength and 6 out of 10 for its profitability.
On Wall Street, the stock has a median recommendation rating of overweight with an average target price of $27.44 per share.
Gray Television
The third stock that qualifies is Gray Television Inc. (GTN, Financial), an Atlanta-based television broadcasting company.
The stock closed around $21.69 per share on Tuesday, below the projected free cash flow of $64.61. The share price has risen 18.92% over the past year for a market capitalization of $2.09 billion and a 52-week range of $6.3 to $25.24.
GuruFocus has assigned a score of 3 out of 10 for the company's financial strength and 8 out of 10 for its profitability.
On Wall Street, the stock has a median recommendation rating of buy with an average target price of $28.43 per share.
