Value Ideas: UBS Thinks These 5 Undervalued Stocks Will Outperform

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Do you consider yourself a value investor? Do you like to shop for bargains?

Stocks trade in much the same way as anything -- some are sold at better prices than others. Some offer more value for their price, and some are too expensive (or "overpriced").

Finding value
One idea on how to find stocks trading at attractive prices is to use the Graham equation, which was created by the "godfather of value investing" Benjamin Graham. The equation calculates the maximum fair value for a stock, and stocks trading at significant discounts to their "Graham number" may be undervalued.

The Graham Number = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share). This equation assumes that a stock is overvalued if P/E is over 15 or P/BV is over 1.5.

Sell side analysts
To add another dimension to this method, it helps to find stocks that not only appear undervalued, but also have the optimism of sell side analysts.

Sell side analysts work at banks and produce research that is given to brokerage clients for their investment considerations. When the research comes from a reliable analyst, a report can have a big effect on a stock's share price. Their ratings usually come in the form of "Buy" or "Sell," or "Overweight" or "Underweight."

Business section: Investing ideas
To illustrate these ideas, we ran a screen on stocks with current "Buy" ratings from analysts at UBS for those that are also undervalued relative to their Graham Number.

These stocks appear undervalued, and analysts at UBS are optimistic on their outlooks -- do you agree with their optimism? Or are these stocks not the good bargains they appear to be?

List sorted alphabetically. (Click here to access free, interactive tools to analyze these ideas.)

1. Fifth Third Bancorp (NAS: FITB) : Operates as a diversified financial services holding company in the United States. On 11/08/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 1.19, and a MRQ book value per share value at 13.73, implies a Graham Number fair value = sqrt(22.5*1.19*13.73) = $19.17. Based on the stock's price at $13.75, this implies a potential upside of 39.44% from current levels.

2. Georgia Gulf (NYS: GGC) : Engages in the manufacture and marketing of chlorovinyl and aromatics chemicals, as well as vinyl-based building and home improvement products in the United States and internationally. On 01/25/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 2.18, and a MRQ book value per share value at 14.65, implies a Graham Number fair value = sqrt(22.5*2.18*14.65) = $26.81. Based on the stock's price at $23.19, this implies a potential upside of 15.59% from current levels.

3. The Goldman Sachs Group (NYS: GS) : Provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. On 05/04/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 6.57, and a MRQ book value per share value at 131.09, implies a Graham Number fair value = sqrt(22.5*6.57*131.09) = $139.21. Based on the stock's price at $99.76, this implies a potential upside of 39.54% from current levels.

4. State Street (NYS: STT) : Provides various financial services and products to the institutional investors worldwide. On 12/16/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 3.19, and a MRQ book value per share value at 38.84, implies a Graham Number fair value = sqrt(22.5*3.19*38.84) = $52.80. Based on the stock's price at $43.05, this implies a potential upside of 22.65% from current levels.

5. TCF Financial (NYS: TCB) : Operates as the bank holding company for TCF National Bank that provides various retail and commercial banking products and services in the United States and Canada. On 11/08/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 0.8, and a MRQ book value per share value at 11.8, implies a Graham Number fair value = sqrt(22.5*0.8*11.8) = $14.57. Based on the stock's price at $11.24, this implies a potential upside of 29.66% from current levels.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Alexander Crawford does not own any of the shares mentioned above. Data sourced from Yahoo! Finance.

At the time this article was published The Motley Fool owns shares of Fifth Third Bancorp. Motley Fool newsletter services have recommended buying shares of The Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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