CAPM is the most well respected model of valuation in financial theory. There are special derivatives of the theory, which use more factors, but the basic premise is the same: stocks behave in a relative fashion, regardless of the base value.
The most basic comparison is comparing a stock's relative risk to that of the market, and then comparing performance. The Capital Asset Pricing Model suggests that the expected return of a stock is based upon the beta of each company's stock. I ran a regression and calculated betas on all of the stocks in the telecom industry and created a CAPM valuation to show the prior one-month CAPM alpha value.
The results are very clear and show that MetroPCS (PCS) is offering compelling value versus the sector, potentially undervalued by as much as 17.3%. Sprint (NYSE:S) and Verizon (NYSE:VZ) still both offer acceptable value as well. AT&T (NYSE:T) on the other hand appears to be overvalued for the short-to-medium run.
On a more basic level, the results also show that the market is pricing MetroPCS with tremendous risk. I find this to be absurd as it offers less risk than really any of the other companies due to its market niche in low-end products.
(Click chart to expand)
|one month return||10.88%||-0.34%||1.96%||-5.92%||3.92%|
|one month alpha||17.29%||7.24%||12.01%||-2.08%|
Disclosure: I am long PCS.