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Discounted Cash Flow Championship Results For 12-31-2012

|Includes: ANTM, ASFI, BTN, CVI, Full House Resorts, Inc (FLL), HUM, PWRD, SD, SSRI, STT, VMED

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 2,240 ranked companies was obtained from Yahoo! finance at the market close on December 28, 2012.

The methodology.


I found the current discount rate to be 8.6%. At this rate, 1,121 companies included in the analysis were undervalued and 1,119 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
SSRI 0.30% 145%
VMED 0.81% 299%
SD 3.17% 66%
STT 3.45% 209%
CVI 3.96% 77%

The entire list of pure value champions changed from the previous week. This is due primarily to the change in the mix of companies showing up on the screen. Of the previous weeks champions, NVTL, OSBC, RIMG, and MTEX no longer show up in the screen. EPAX has dropped to the #60 slot with a new valuation percentage of 21.55%.

But 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 3.98% 174%
HUM 8.02% 91%
BPI 8.72% 80%
QCOR 11.05% 48%
ZX 13.99% 49%

There is less upside for these five companies than for the pure picks, but the valuation should be more dependable.

Previous Week's List

Ticker Current Valuation Percentage Current Conservative Estimate Position Current Overall Position
FLL 59.09% 131 379
HUM 8.02% 2 20
WLP 27.94% 17 80
ASFI No longer valued    
BTN 28.51% 22 87

Full House resorts, the company that made me rethink the screening criteria, now appears to be only moderately undervalued. Asta funding is no longer valued as it does not appear on the new screening criteria. The other three companies are still significantly undervalued but are no longer in the top five.

Also, 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.

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