The 'Value' of Corrections: Seven Stocks to Consider

by: Jason Merriam

Now that equity valuations have (for the most part) returned from the stratosphere, its time for those killjoy value investors to emerge from hibernation and start dusting off their wish lists.

We do not know if this corrective phase is over or not, but we are pretty sure equity prices are more appetizing than they were a month ago. So, while technical investors heal from the wounds of multiple support level violations, value investors can find some comfort in the voice of fundamental reason.

The table below offers a small list of stocks, which in our opinion are either potentially undervalued or overvalued based on our dual cash-flow and accrual analysis screen. Our model compares key GAAP financial statement data over the previous seven reported quarterly periods.

In our program, the numbers get tweaked a bit and it’s designed primarily to help us determine the true earnings quality of a security by identifying the cash and non-cash components used to build the earnings statement.

“Fair Value” estimates presented are derived by comparing changes in certain relationships of the cash/non-cash flows to a security’s closing price on the ending date of most recent quarter report.

To view a full report for any security listed, click the quarter ending date.


Est. Fair-Value

End-of-Qtr. Price

Qtr. Ending

Apple Inc. (NASDAQ:AAPL)

$ 194.12

$ 230.90



$ 10.26

$ 12.90



Lindsay Corp. (NYSE:LNN)

$ 39.43

$ 36.81


Intl. Bus. Machines (NYSE:IBM)

$ 124.32

$ 128.25



$ 28.41

$ 26.97


Intel Corp. (NASDAQ:INTC)

$ 21.43

$ 22.24


Philip Morris Intl. (NYSE:PM)

$ 46.99

$ 52.16


AAPL: We can’t knock the balance sheet and it’s great to see revenue recognition issues standardized and in conformity with GAAP guidelines. Earnings quality looks quite good, but shares are still overvalued at current levels.

DELL: Rising non-cash assets, increased receivables and payables hint to slowing cash-conversion cycles. The stock is down more than 28% since the market highs set on April 23, but it’s still north of our FV est. by a good 20%.

LNN: Earnings quality remains quite strong in spite of the difficult environment for this maker of agricultural irrigation systems and other infrastructure related products. Shares have pulled-back some 25% since mid March and are currently well below our est. FV.

IBM: Gartner Research recently announced that rival Hewlett-Packard has overtaken Big Blue as the top maker of servers by sales. Yet, IBM remains a superbly managed company and being pushed into second place (regarding server sales) is purely a matter of semantics. Shares are off about 8% from 2010 highs, but currently trading near our FV est.

EBAY: Bullish dual cash-flow trends and improving cost structures are offset by rising accruals and declines in capital productivity. Nonetheless, shares are 28% off mid-March highs and 25% under our FV est. at current levels.

INTC: Great balance sheet, healthy operating cash-flow generation, improving capital productivity and revenue metrics. What’s not to like? Stock is trading 17% below its April highs and currently near our FV est. Besides, who would have ever thought you could buy INTC as a dividend play? Current yield is 3%.

PM: Although debt-to-equity ratio is high at 3.28, the company generates excellent returns on assets and capital. Shares are 17% below the April 9th highs and currently 8% below our FV target price. Current yield is 5.3%

Disclaimer: Fair-Value estimates are intended to provide us a baseline or starting point from which to evaluate a security’s intrinsic value. Ultimately, market participants will decide what a security is worth at any particular point in time.

That said, it is always recommended to conduct a thorough due-diligence on any security before making an investment.

Disclosure: Author holds a long position in LNN, EBAY and INTC