- By Margaret Moran
GuruFocus has recently developed the GuruFocus Fair Value Line, a unique method of estimating the intrinsic value of a stock.
Building off of the popular Peter Lynch chart, which compares a stock's current price to how much its earnings per share would be worth if it traded at a price-earnings ratio of 15, the GF Value Line seeks to take more than price alone into account when attempting to determine value. This new metric considers the following three categories of information:
Historical price-earnings, price-book, price-sales and price-to-free-cash-flow ratios.
A GuruFocus adjustment factor based on the company's past returns and growth.
Future estimates of the business' performance.
Below is an example of the GF Value Line for Costco Wholesale Corp. (NASDAQ:COST), a stock that investors often say they would love to own for a lower initial buying price. The blue line represents the stock's price, while the solid black line represents the past intrinsic values calculated by the GF Value Line and the dotted black line represents estimates of future intrinsic value. The red and green bands represent overvaluation and undervaluation, respectively, with darker colors (farther from the black line) representing more dramatic deviations from intrinsic value.
GuruFocus users can now use the All-in-Once Screener to screen for stocks based on how their current share prices compare to the intrinsic value estimated by the GF Value Line. If the ratio of the price to the GF Value Line is less than 1, the stock is likely to be undervalued. However, if the ratio is too low, it could indicate the presence of a value trap, i.e., a stock that appears undervalued at first glance but truly deserves the low valuation because of declining business or financials.
Thus, I searched the All-in-One Screener for stocks that were trading at a price-to-GF-value ratio between 0.4 and 0.8. I then sorted the results based on which stocks were owned by the most gurus. According to the screener, the top three most popular guru stocks trading below the GF Value Line are Baidu Inc. (NASDAQ:BIDU), CVS Health Corp. (NYSE:CVS) and Charles Schwab Corp. (NYSE:SCHW).
Baidu is a Chinese internet and technology giant that specializes in artificial intelligence, internet services and search engines. Its most iconic products are the Baidu search engine and the Baike online encyclopedia.
On Sept. 15, shares of Baidu traded around $124.05 while the GF value stood at $167.95 for a price-to-GF-value ratio of 0.74, making the stock modestly undervalued.
According to the most recent Securities and Exchange Commission reports, 27 gurus owned shares of the company. Jim Simons (Trades, Portfolio)' Renaissance Technologies is the largest guru shareholder company with 2.80% of shares outstanding, followed by Primecap Management with 2.35% and Sarah Ketterer (Trades, Portfolio) with 1.76%. Gurus have been net buyers of the stock in recent quarters.
Baidu has a GuruFocus profitability rating of 8 out of 10 and a financial strength rating of 6 out of 10. The three-year revenue growth rate is 14.4%, while the three-year Ebitda growth rate is 0.5%.
CVS Health is a health care company that owns the CVS Pharmacy retail pharmacy chain, as well as Aetna (a health insurance provider), CVS Caremark (a pharmacy benefits manager) and several smaller operations. It is headquartered in Woonsocket, Rhode Island.
On Sept. 15, shares of CVS Health traded around $57.16 while the GF value stood at $71.73 for a price-to-GF-value ratio of 0.79, making the stock modestly undervalued.
According to the most recent SEC reports, 26 gurus owned shares of the company. Dodge & Cox is the largest guru shareholder of the company with 1.22% of shares outstanding, followed by Barrow, Hanley, Mewhinney & Strauss with 0.74% and Bill Nygren (Trades, Portfolio) with 0.25%. In recent quarters, gurus have bought the stock about as often as they have sold it.
GuruFocus gives CVS Health a profitability rating of 8 out of 10 and a financial strength rating of 5 out of 10. The three-year revenue growth rate is 6.1% while the three-year Ebitda growth rate is 3.6%.
Charles Schwab is a financial services company that offers a wide range of products, from mutual funds and bonds to options and futures. Headquartered in San Francisco, the discount online broker has more than 12 million in client accounts and $3.85 trillion in assets under management.
On Sept. 15, shares of Charles Schwab traded around $34.82 while the GF value stood at $49.20 for a price-to-GF-value ratio of 0.71, making the stock modestly undervalued.
According to the most recent SEC reports, 24 gurus owned shares of the company. Dodge & Cox is the biggest shareholder with 7.43% of shares outstanding, followed by Al Gore (Trades, Portfolio) with 2.06% and Pioneer Investments (Trades, Portfolio) with 0.91%. Gurus have bought the stock more than they have sold it in recent quarters.
Charles Schwab has a GuruFocus profitability rating of 5 out of 10, which is good for a company operating in the capital markets industry. The three-year revenue growth rate is 13.2%, backed by a return on equity of 12.72%, with net income growing at a similar clip.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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This article first appeared on GuruFocus.