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As part of our process, we perform a comprehensive analysis of a company's discounted cash-flow valuation, relative valuation versus industry peers, as well as an assessment of technical and momentum indicators. This process culminates in what we call our Valuentum Buying Index (VBI), which ranks stocks on a scale from 1 to 10, with 10 being the best. Please click here for a narrated presentation on our process, which covers why 'Valuentum' investing works.

If a company is undervalued both on a DCF and on a relative valuation basis and is showing improvement in technical and momentum indicators, it scores high on our scale. Here's how the performance distribution of our scores has evolved, using the scores of companies in the inaugural edition of our Best Ideas Newsletter:

(Click charts to expand)

Before we dive into the five significantly undervalued stocks we are highlighting today, let's take a look at two of our calls that have contributed to the distribution above:

Example #1 - Apple (NASDAQ:AAPL)

On June 17, 2011, we published an article on Seeking Alpha that suggested Apple was significantly undervalued. At the time, Apple was trading around $320 per share and now it fetches a price tag near $500 per share. We're still expecting substantial upside for Apple to north of $530 per share.

Example #2 - AMR Corp (AMR), the parent of American Airlines

On May 17, 2011, we wrote on Seeking Alpha a controversial article on AMR Corp, the parent of American Airlines suggesting its equity was practically worthless. The stock was trading at about $7 per share at the time. And now, as many know, American has filed for bankruptcy.

Five Significantly Undervalued Stocks

By now, we hope that we have established some credibility with you regarding our methodology, which we apply systematically across all companies in our coverage universe.

Without further delay, we reveal below five significantly undervalued stocks (on our site, we have a longer list, which we update regularly). These stocks are not only trading below our estimate of their intrinsic value based on our DCF process but they are also trading at a discount relative to peers.

Five Significantly Undervalued Stocks

Ancestry.com (NASDAQ:ACOM)

Ancestry.com earns a ValueCreation™ rating of EXCELLENT, the highest possible mark on our scale. The firm has been generating economic value for shareholders for the past few years, a track record we view very positively. We expect the firm's return on invested capital (excluding goodwill) to expand to 77.5% from 53.5% during the next two years. Ancestry.com has an excellent combination of strong free cash flow generation and low financial leverage. We expect the firm's free cash flow margin to average about 18.1% in coming years, and the firm had no debt as of last quarter. Ancestry.com's valuation is compelling at this time. The firm is trading at a nice discount to our estimate of its fair value, even after considering an appropriate margin of safety. The forward earnings multiple and PEG ratio also look attractive versus peers. We think the market is underestimating the long-term subscriber growth potential of the company based on demographic trends, as well as dismissing the biggest catalyst that genealogy research has seen in a decade, the release of the 1940 U.S. Federal Census (in April of this year).

Xerox (NYSE:XRX)

Xerox earns a ValueCreation™ rating of EXCELLENT, the highest possible mark on our scale. The firm has been generating economic value for shareholders for the past few years, a track record we view very positively. We expect the return on invested capital (excluding goodwill) to expand to 21.2% from 16.8% during the next two years. Xerox 's cash flow generation is robust, but its financial leverage could potentially be concerning down the road. If cash flows begin to weaken, we'd become more cautious on the overall financial health. Xerox 's relative stock price performance, undervaluation, and dividend yield of 2.1% may make it attractive to a variety of investors. Having more types of investors interested in its shares increases the potential for future stock price appreciation, in our opinion. The concept of having as many types of investors interested in a stock represents the core of the ideas we seek to deliver to our subscribers.

Avon Products (NYSE:AVP)

Avon Products earns a ValueCreation™ rating of EXCELLENT, the highest possible mark on our scale. The firm has been generating economic value for shareholders for the past few years, a track record we view very positively. Return on invested capital (excluding goodwill) has averaged 45.5% during the past three years. Avon Products's valuation is compelling at this time. The firm is trading at a nice discount to our estimate of its fair value, even after considering an appropriate margin of safety. The forward earnings multiple and PEG ratio also look attractive versus peers. The firm sports a very nice dividend yield of 5.5%. We expect the firm to pay out about 51% of next year's earnings to shareholders as dividends. Though the company is not without significant risks, the risk/reward at today's levels appears attractive. And the company represents a very interesting, yet speculative, income play.

Hasbro (NASDAQ:HAS)

Hasbro has an excellent combination of strong free cash flow generation and low financial leverage. We expect the free cash flow margin to average about 12.3% in coming years. Total debt-to-EBITDA was 1.8 last year, while debt-to-book capitalization stood at 46.6%. Hasbro earns a ValueCreation™ rating of EXCELLENT, the highest possible mark on our scale. The firm has been generating economic value for shareholders for the past few years, a track record we view very positively. Return on invested capital (excluding goodwill) has averaged 55.2% during the past three years. Hasbro 's valuation is compelling at this time. The firm is trading at a nice discount to our estimate of its fair value, even after considering an appropriate margin of safety. The firm's forward earnings multiple and PEG ratio also look attractive versus peers. Recent results suggest that Hasbro's fundamental trajectory remains positive, particularly with its juicy dividend, which it just hiked materially.

Republic Services (NYSE:RSG)

Republic Services' cash flow generation is robust, but its financial leverage could potentially be concerning down the road (our only concern with this tried-and-true trash taker). If cash flows begin to weaken, we'd become more cautious on the firm's overall financial health, but strong and sustainable cash-flow generation mitigate this concern to a large extent. The garbage-hauler's relative stock price performance, undervaluation, and dividend yield of 3%+ may make it attractive to a variety of investors. We think this increases the potential for future stock price appreciation.

Disclosure: AAPL and ACOM are included in the portfolio of our Best Ideas Newsletter. HAS and RSG are included in the portfolio of our Dividend Growth Newsletter.

Source: 5 Significantly Undervalued Stocks