As part of our process, we perform a comprehensive analysis of a firm's discounted cash-flow valuation (view our DCF model template), 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.

Essentially, we're looking for stocks that have the most qualities of the most common investment approaches out there -- the overlapping area in the center of the diagram below, where most of the investment community's buying power rests:

Now that we covered our approach to investing, let's take a look at our stock-picking track record to build some credibility before we outline five of the cheapest stocks on the market today:

## 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 the firm fetches a price tag near $600 per share. We're still expecting substantial upside for Apple.

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

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.

## Example #3 - Netflix (NASDAQ:NFLX)

On July 26, 2011, we wrote that Netflix 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.

## Five 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. If you're still skeptical, view our track record. The performance of the portfolio of our Best Ideas Newsletter is nothing short of fantastic.

Without further delay, we reveal below five of the cheapest stocks on the market today (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.

**EDAC Tech** **(NASDAQ:EDAC)**

We think EDAC Tech's shares are worth $23 each, which represents a price-to-earnings (P/E) ratio of about 33.8 times last year's earnings and an implied EV/EBITDA multiple of about 14.7 times last year's EBITDA. Our model reflects a compound annual revenue growth rate of 8.9% during the next five years, a pace that is lower than the firm's 3-year historical compound annual growth rate of 24.7%. Our model reflects a 5-year projected average operating margin of 12.3%, which is above EDAC Tech's trailing 3-year average. Beyond year 5, we assume free cash flow will grow at an annual rate of 3% for the next 15 years and 3% in perpetuity. For EDAC Tech, we use a 9.7% weighted average cost of capital to discount future free cash flows.

*(click to enlarge)*

## Ancestry.com (NASDAQ:ACOM)

We think Ancestry.com's shares are worth $47 each, which represents a price-to-earnings (P/E) ratio of about 32.5 times last year's earnings and an implied EV/EBITDA multiple of about 16.5 times last year's EBITDA. Our model reflects a compound annual revenue growth rate of 14.3% during the next five years, a pace that is lower than the firm's 3-year historical compound annual growth rate of 21.1%. Our model reflects a 5-year projected average operating margin of 27.9%, 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.

## Halliburton (NYSE:HAL)

We think Halliburton's shares are worth $56 each, which represents a price-to-earnings (P/E) ratio of about 17.2 times last year's earnings and an implied EV/EBITDA multiple of about 8.7 times last year's EBITDA. Our model reflects a compound annual revenue growth rate of 9.1% during the next five years, a pace that is lower than the firm's 3-year historical compound annual growth rate of 10.7%. Our model reflects a 5-year projected average operating margin of 19.4%, which is above Halliburton's trailing 3-year average. Beyond year 5, we assume free cash flow will grow at an annual rate of 3.8% for the next 15 years and 3% in perpetuity. For Halliburton, we use a 9.9% weighted average cost of capital to discount future free cash flows.

## General Cable (NYSE:BGC)

We think General Cable's shares are worth $47 each, which represents a price-to-earnings (P/E) ratio of about 35.9 times last year's earnings and an implied EV/EBITDA multiple of about 9.2 times last year's EBITDA. Our model reflects a compound annual revenue growth rate of 7% during the next five years, a pace that is higher than the firm's 3-year historical compound annual growth rate of 1.8%. Our model reflects a 5-year projected average operating margin of 5.3%, which is below General Cable's trailing 3-year average. Beyond year 5, we assume free cash flow will grow at an annual rate of 2.7% for the next 15 years and 3% in perpetuity. For General Cable, we use a 8.8% weighted average cost of capital to discount future free cash flows.

## Dell (NASDAQ:DELL)

We think Dell 's shares are worth $25 each, which represents a price-to-earnings (P/E) ratio of about 13.3 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 1.8% during the next five years, a pace that is higher than the firm's 3-year historical compound annual growth rate of 0.5%. Our model reflects a 5-year projected average operating margin of 7.5%, which is above Dell 's trailing 3-year average. Beyond year 5, we assume free cash flow will grow at an annual rate of 0.8% for the next 15 years and 3% in perpetuity. For Dell , we use a 10.2% weighted average cost of capital to discount future free cash flows.

**Additional disclosure:** AAPL, ACOM, and EDAC are included in our Best Ideas portfolio.

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