Expert: Paul Henneman - 2/28/2004

Question
I have trouble reconciling the relationship between the degree that ValuEngine over values or undervalues a stock and its 1 and 3 year price targets. For example Affymetrix (AFFX)current price $33.99 fair value 24.02 is listed as overvalued by 41.53% but its 1 year price projection is $39.94 +17.5% and its 3 year price projection is $47.94 +41.3%.  

Answer
Thank you for your question!
  ValuEngine uses a two step approach to fair market valuation and stock forecasting:
1.  Fair market valuation is computed first. This complex proprietary model computes what ValuEngine thinks a company should trade at, if the markets were perfectly effecient and everything traded at its true worth.
2.  The second model is the forecast model (divided into 6 different time horizons). The valuation figure carries over as one variable, but 7 additional variables are used. This figure represents what ValuEngine feels a company actually will trade at given current industry, sector, and overall economic conditions.
One of the strenghts of the system is that there is no assumption that an undervalued company will increase in stock price. As we have increasingly seen over the past few years, just because a company is undervalued (trading at less than what it should), it does not mean that it will not become even MORE undervalued before turning in momentum. The opposite can also be true in the example you give. A stock may be overvalued, but it also may have very strong momentum and other characteristics that lead the ValuEngine models to determine that its increasing stock price is not yet over.
The market is continually over valuing and under valuing companys. ValuEngine attempts not only to determine what is over or undervalued, but to provide price target guidance. This seperation of valuation and target price is what has led to such strong performance of the ValuEngine models even during terrible bear markets. Just because a stock is undervalued, it may not be a good buy.
Ideally, investors should look for undervalued stocks with strong forecast figures. A stock that is overvalued but still has strong forecast figures can be considered a good investment, but more risky and more diligence should be exerted in researching its potential.
I hope this helps! Please do not hesitate to follow up with me if I can be of any additional help!

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com