CAPM Filtered Strong List

[lote_tree]

Given the recent turmoil in the markets I've been searching for some undervalued stocks using the CAPM. Being new to fundamental analysis I thought I'd share my findings with everyone. These are some of the stocks I'll be watching if the market turns bullish.

The first set of stocks were filtered through the FINVIZ screener. Below you will find the descriptive and fundamental criteria used. Most of the filters were provided by Iraj's strong list screen posted by Charlton (Double thank You). The aim was to find companies with good prospects coupled with healthy balance sheets. Specifically I was looking for companies with lower levels of debt compared to equity. I then calculated the target price of each stock (barring the financials) using the CAPM spreadsheet posted by Glenn (Thank You).

The second set of stocks listed as "Other Companies" used a similar search criteria. Having looked at their balance sheets and their prospects I decided to use the CAPM on them.

A few things to note:

The interest rate currently in the U.S is set at 1.5%, had I used this figure most of the stocks listed on the screener would have been undervalued. However, I used a more realistic rate of 3.5% to calculate the target price.

All beta values were taken from Value Line:

Value Line - The Most Trusted Name in Investment Research

The financial statements used to calculate the target price were provided by Reuters:

Stock Quotes - News on Top Stocks, Company Profiles | Reuters.com

I'm not encouraging anyone to buy any of these stocks I'm simply giving ideas backed up with some data. The market may fall another 2000 points before we see any meaningful trend change but it will be interesting to see how these stocks perform.

Cheers

Naeem

 

[Charlton]

Given the recent turmoil in the markets I've been searching for some undervalued stocks using the CAPM. Being new to fundamental analysis I thought I'd share my findings with everyone. These are some of the stocks I'll be watching if the market turns bullish.

The interest rate currently in the U.S is set at 1.5%, had I used this figure most of the stocks listed on the screener would have been undervalued. However, I used a more realistic rate of 3.5% to calculate the target price.

The link below shows current US interest rates (and their definitions) ranging from 1.5 up to 4.5 depending on which rate you use

Current Prime rate, LIBOR rates and other major interest rates

Do you have any views on the most appropriate rate to use in this model ? I was wondering why you chose to ignore 1.5% and choose 3.5% and your reasons for saying it is more realistic. You said that most stocks listed on the screener would have been undervalued using 1.5%, but was it not the case that on 12th October stocks were undervalued generally ?

Also if you google CAPM + VALIDITY + APT, there are some interesting studies questioning the validity of CAPM. I wonder also whether these concerns would be heightened or decreased in the current market climate.

I haven't formed any views on this personally yet, but merely throw out some questions. It is good that you have raised this topic again, as Iraj has said in the past that he makes most of his money from swing trading and not day trading, so it is interesting to shift the focus again back to this aspect.

Charlton

 

[lote_tree]

The link below shows current US interest rates (and their definitions) ranging from 1.5 up to 4.5 depending on which rate you use

Current Prime rate, LIBOR rates and other major interest rates

Do you have any views on the most appropriate rate to use in this model ? I was wondering why you chose to ignore 1.5% and choose 3.5% and your reasons for saying it is more realistic. You said that most stocks listed on the screener would have been undervalued using 1.5%, but was it not the case that on 12th October stocks were undervalued generally ?

Also if you google CAPM + VALIDITY + APT, there are some interesting studies questioning the validity of CAPM. I wonder also whether these concerns would be heightened or decreased in the current market climate.

I haven't formed any views on this personally yet, but merely throw out some questions. It is good that you have raised this topic again, as Iraj has said in the past that he makes most of his money from swing trading and not day trading, so it is interesting to shift the focus again back to this aspect.

Charlton

Charlton,

You pose some very interesting questions.

I used the rates at the start of the year. The bench mark used can be found here:

FRB: Monetary Policy, Open Market Operations

According to the CAPM spreadsheet interest rates set at 1.5% would sky rocket the target price of most stocks, even stocks that are fundamentally weak. I agree that most stocks out there are undervalued anyway but first and foremost I wanted to sift out good quality stocks with strong balance sheets and good earning prospects. Stocks with low levels of debt compared to equity would be considered even more attractive.

One of the reasons I discarded 1.5% was because value is relative to economic climates when using a model like CAPM. In order to lower risk I took a conservative approach and used 3.5% as a benchmark, this ensured to a degree that at least the value of perpetuity in stocks were seen through the prism of "normal" economic environments rather than the current environment. Jan 2008 seemed closer to the norm than October 2008, this was a judgement call on my part.

When using CAPM we find that the value of perpetuity increases drastically in current conditions. This is critical, especially if we adopt the premise that the market may have already priced in a recessionary climate for most stocks. Therefore CAPM target prices set from 1.5% may be overshooting the value of most companies, even very good ones.

The current crisis has obviously influenced central banks to lower rates to extremely low levels and I’m thinking that yes, these are the realities at the moment but what if interest rates rise, what would happen to the value of stocks from a CAPM perspective? Would I have a basket of stocks that are valuable now but worthless in a few months time if interest rates increase, providing that the market stays as it is now?

Ultimately we find that it’s not just interest rates but first and foremost it’s companies with good balance sheets and great prospects that start "the story of a stock" (I picked that up from Peter Lynch ). Such a combination may recession proof most stocks and increase the probabilities of them reverting back to their mean. We know that the market will reward value over time.

Naeem