3 Significantly Undervalued Stocks

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 |  Includes: AAPL, ACOM, EBAY, INTC, NFLX
by: Valuentum

As part of our process, we perform a comprehensive analysis of a firm'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. 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 the performance of our VBI since the inception of our Best Ideas Newsletter:

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Before we dive into the five cheapest stocks on the market today, let's take a look at our stock-picking track record to build some credibility with you.

On June 17, 2011, we published an article on Seeking Alpha that suggested Apple (AAPL) was significantly undervalued. At the time, Apple was trading around $320 per share and now the firm fetches a price tag near $580 per share. We're still expecting substantial upside for Apple to the mid-$600's.

On May 17, 2011, we wrote 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.

On July 26, 2011, we wrote that Netflix (NFLX) was absurdly overvalued. Netflix was trading well over $200 per share. Netflix has recovered somewhat from its lows, but it still way off its highs when we wrote the article.

Three of the Cheapest Stocks on the Market Today

By now, we hope that we have established some credibility with you regarding our stock-picking skills (the above are just a few examples). Without further delay, we reveal below three of the cheapest stocks on the market today (on our site, we have a longer list, which we update regularly here). 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.

eBay (EBAY)

Our discounted cash flow model indicates that eBay's shares are worth between $35 and $58 each. The margin of safety around our fair value estimate is driven by the firm's MEDIUM ValueRisk™ rating, which is derived from the historical volatility of key valuation drivers. The estimated fair value of $46 per share represents a price-to-earnings (P/E) ratio of about 33.9 times last year's earnings and an implied EV/EBITDA multiple of about 20 times last year's EBITDA. Our model reflects a compound annual revenue growth rate of 16.9% during the next five years, a pace that is higher than the firm's 3-year historical compound annual growth rate of 6.1%. Our model reflects a 5-year projected average operating margin of 26%, which is above eBay 's trailing 3-year average. Beyond year 5, we assume free cash flow will grow at an annual rate of 6% for the next 15 years and 3% in perpetuity. For eBay, we use a 11.5% weighted average cost of capital to discount future free cash flows.

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Ancestry.com (ACOM)

Our discounted cash flow model indicates that Ancestry.com's shares are worth between $27 and $55 each. The margin of safety around our fair value estimate is driven by the firm's HIGH ValueRisk™ rating, which is derived from the historical volatility of key valuation drivers. The estimated fair value of $41 per share represents a price-to-earnings (P/E) ratio of about 54.2 times last year's earnings and an implied EV/EBITDA multiple of about 19.4 times last year's EBITDA. Our model reflects a compound annual revenue growth rate of 17.8% during the next five years, a pace that is higher than the firm's 3-year historical compound annual growth rate of 15.1%. Our model reflects a 5-year projected average operating margin of 26.4%, which is above Ancestry.com's trailing 3-year average. Beyond year 5, we assume free cash flow will grow at an annual rate of 6.4% for the next 15 years and 3% in perpetuity. For Ancestry.com, we use a 10.8% weighted average cost of capital to discount future free cash flows.

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Intel (INTC)

Our discounted cash flow model indicates that Intel 's shares are worth between $28 and $42 each. The margin of safety around our fair value estimate is driven by the firm's LOW ValueRisk™ rating, which is derived from the historical volatility of key valuation drivers. The estimated fair value of $35 per share represents a price-to-earnings (P/E) ratio of about 14.6 times last year's earnings and an implied EV/EBITDA multiple of about 7.7 times last year's EBITDA. Our model reflects a compound annual revenue growth rate of 5.4% during the next five years, a pace that is lower than the firm's 3-year historical compound annual growth rate of 12.8%. Our model reflects a 5-year projected average operating margin of 30.7%, which is above Intel 's trailing 3-year average. Beyond year 5, we assume free cash flow will grow at an annual rate of 2.1% for the next 15 years and 3% in perpetuity. For Intel, we use a 10.5% weighted average cost of capital to discount future free cash flows.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Some of the firms above may be included in our actively-managed portfolios.