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DCF Championship Results For January 11, 2013

|Includes:CVI, FANH, GAGA, HUM, JPM, PTP, Perfect World Co., Ltd. (PWRD), SD, SSRI, VMED, WDC

The valuations and rankings of all companies analyzed this week are available in a Google spreadsheet here.

Feel free to go ahead and search for your favorite company. There's a good chance it has been valued.

Data on 2,180 ranked companies was obtained from Yahoo! finance at the market close on January 11, 2013.

The methodology.


The current discount rate is 9.1%. At this rate, 1,089 companies included in the analysis were undervalued and 1,079 companies included in the analysis were overvalued.

Here are the distributions of different valuation percentages:

Yes Virginia, valuation does matter

There are three reasons a company may be an outlier on this valuation curve; the market has mispriced them, the analysts have overestimated them, or the valuation calculation just doesn't fit them.

In other words; either the market is wrong, the analysts are wrong, or I'm wrong.

Obviously, I'm hoping that the cause of the undervaluation is that the market is wrong; that is when there's a big payoff. What's less obvious is that my second preference is actually for me to be wrong, because at least in that case I can expect the stock to simply market perform. When the analysts are wrong, the company ends up missing earnings and losses mount.

The Champion And Runners Up

According to the model, the following companies are trading at the absolute greatest discount to their intrinsic value:

5 Most Undervalued Companies

Ticker Valuation Percentage Target Annual Return
PTP 0.12% 6300%
SSRI 0.18% 180%
JPM 1.06% 760%
CVI 2.55% 107%
SD 3.06% 67%

I did allow one minor correction this week- AU, AngloGold Ashanti- originally showed up in the number 3 spot as the raw data showed the analyst one year growth estimate where the five year estimate should have been. Because AngloGold is one of the world's largest companies- and I've noticed oddities with the data from AngloGold before- this stuck out like a sore thumb. I generally avoid making corrections of this nature, not because they aren't waranted, but rather because the resulting valuation for AU is now not a blind valuation - i.e. it required me to look at the name and price of the ticker and make a judgement call. But I couldn't resist, it was too obvious.

Database errors such as this are part of the reason that I do not consider the raw list of the most undervalued companies to be the DCF champions. These companies are outliers- a company with an error in the database or encountering any sort of accounting oddity will shoot straight to the top or the bottom of the valuation list.

Another big name on the list this week, JPM, is an example of why price targets are sometimes more reasonable than target returns. I rank companies based on enterprise value rather than market capitalization, and JPM's extreme undervaluation is due largely to the amount of cash on the balance sheet. So while the target return rate is unrealistically high, the price target is actually just 116 compared to a current price of 46. Usually with these outlier companies it is the other way around.

The most undervalued companies are not the champions. Because I want to avoid companies that only appear undervalued due to overexuberant analysts I employ a simple estimate quality factor as an additional screen. The following five companies are the most undervalued companies whose projected growth rate is no more than twice the return on assets.

5 Most Undervalued Companies, Conservative Growth Estimates

Ticker Valuation Percentage Target Annual Return
PWRD 3.26% 221%
VMED 4.21% 194%
CISG 6.10% 130%
GAGA 10.49% 56%
WDC 16.96% 46%

There is less upside for these five companies than for the pure picks, but the valuation should be a bit more dependable. Although due diligence is still warranted.

Humana, HUM had appeared in the previous two iterations of this list. It is now in the number 34 position for conservative growth estimate companies, and is now 40.69% undervalued. I'll have to look into this.

In the past I referred to all five of these companies as champions. I did this because I believe that a basket of all five picks would outperform an investment in just one company. I still believe that, but on second thought five champions is just plain un-American. From now on, only the top ranked company is the champion.

And for the second list in a row, that champion is Perfect World.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.