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Actavis Leads the Way

ACT had been going sideways for a period of about 10 weeks or so up until just this past week when I noticed the stock breaking out to the upside. I'll be watching to see just how far this ascent can carry it.

Valuation

But while I'm watching, let's use valuation as a gauge to come up with a five-year target price. Six- and 12-month target prices are too risky. If we're going to use five-year growth rates then let's use five-year target prices.

Must Read: 25 Stocks in Nuveen Asset Management's New 2014 Portfolio

Data from Best Stocks Now App

When I take ACT's next year's earnings estimates of $12.83 and carry them out applying a five-year growth rate of 22% per year, I come up with a PEG ratio of 0.59. The PEG ratio compares the growth rate with the forward PE and anything under 1 is quite favorable in the growth investing world.

Furthermore, when I take those earnings of $12.83, grow them by 22% per year, and then apply a multiple that I think is appropriate, I come up with a five-year target stock price north of $300.

ACT has 89% upside potential. I like stocks that have at least 80% or more. ACT easily qualifies under my valuation requirements and comes in with a Gunderson Value Grade of 'B+'.

Data from Best Stocks Now App

Now let's rank performance and valuation together. I'm not a value nor momentum investor -- I'm both. I combine value, performance and momentum for finding stocks that are underpriced. This may be a tall order but it really narrows down the entire field.

But it's a big field. We only need to find 25 or so good ones. Out of 3,773 stocks in my Best Stocks Now! app, ACT currently comes in at #17. It is also a stock that I have a large position in in my conservative growth accounts.

At the time of publication the author had a position in ACT.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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