The valuation model we’ve developed is an advanced, data-driven algorithm designed to identify deep-value investment opportunities in UK-listed stocks. It applies quantitative analysis to assess whether a stock is undervalued, fairly valued, or overvalued, based on its earnings power and operational efficiency.
This approach is particularly suited for contrarian investors who look for opportunities where a company's stock price does not fully reflect its true intrinsic value.
How the Valuation Is Determined
At the core of this model is the Price-to-Target Ratio (P/T Ratio), which helps determine if a stock is potentially mispriced.
Key Components of the Valuation Model
1️⃣ Earnings Yield – This measures how much profit a company generates relative to its market price. It is the inverse of traditional valuation multiples like the P/E ratio.
2️⃣ Hybrid Efficiency Score – A proprietary score based on operational margins, profitability, and financial efficiency.
3️⃣ Composite Score – A weighted combination of the earnings yield and efficiency score, providing a final valuation metric.
4️⃣ Target Price Calculation – A fair-value estimate based on a company’s earnings potential and operational strength.
5️⃣ Market Price Comparison – The stock’s latest weekly closing price is compared to its computed target price.
Once we have these factors, we calculate the Price-to-Target Ratio:
P/T Ratio = Target Price ÷ Current Price
If the Price-to-Target Ratio is greater than 1, the stock may be undervalued. If it is below 1, the stock may be overvalued.
Interpreting the Valuation: What the Results Mean
The model assigns a final recommendation based on where the Price-to-Target Ratio falls.
Price Target Ratio & Final Rating
The final output of the model is a qualitative rating based on the price target ratio. This ratio tells you how the estimated fair value compares to the current market price. For example, if the ratio is significantly above 1, the stock is considered undervalued; if it is below 1, the stock may be overvalued. The rating scale is defined as follows:
- Extremely Undervalued: Ratio is 1.75 or above
- Deeply Undervalued: Ratio is between 1.40 and 1.75
- Significantly Undervalued: Ratio is between 1.15 and 1.40
- Moderately Undervalued: Ratio is between 1.05 and 1.15
- Fairly Valued: Ratio is between 0.95 and 1.05
- Moderately Overvalued: Ratio is between 0.75 and 0.95
- Significantly Overvalued: Ratio is between 0.50 and 0.75
- Deeply Overvalued: Ratio is between 0.30 and 0.50
- Extremely Overvalued: Ratio is below 0.30
This scale translates complex calculations into a simple, actionable signal for investors.
If the valuation is flagged as extremely overvalued or undervalued, we do not display a price target but instead classify the stock as either:
✔ Significantly Undervalued (SUV) – The target price is much higher than the market price, indicating a strong undervaluation.
✔ Significantly Overvalued (SOV) – The target price is much lower than the market price, suggesting the stock is trading at unsustainable levels.
Why Do We Use "SUV" and "SOV" Instead of a Target Price Sometimes?
For stocks that are highly mispriced, providing a specific target price can be misleading.
✔ SUV (Significantly Undervalued): If a stock’s computed target price is substantially higher than its market price, a single numerical target may not be appropriate due to fundamental changes in valuation drivers.
✔ SOV (Significantly Overvalued): If a stock’s target price is far below its market price, it suggests the stock may be trading at unsustainable levels and could be at risk of significant correction.
Instead of setting a fixed target, we flag these extreme cases for further due diligence.
Why Use This Valuation Method?
✅ Data-Driven & Objective – The model removes emotional bias and applies consistent, repeatable logic to stock valuations.
✅ Uncovers Deep-Value Opportunities – Helps identify stocks that may be mispriced by the market, presenting opportunities for long-term investors.
✅ Simplifies Stock Comparisons – The scoring system allows for easy evaluation of stocks across different industries.
✅ Focus on Long-Term Investing – The model is designed for deep-value, contrarian investors, not short-term traders.
Potential Limitations & Considerations
❌ This Is Not a Prediction Model – The valuation does not predict future price movements; it only assesses fair value based on available data.
❌ Stocks Can Remain Mispriced for Long Periods – A stock might stay undervalued or overvalued due to market sentiment, economic conditions, or investor behavior.
❌ Fundamentals Can Change Rapidly – If a company reports new earnings, announces strategic changes, or faces external shocks, the valuation could become outdated.
❌ This Model Is Designed for Deep-Value, Long Term Investing – It may not align with short-term growth-oriented investors or traders looking for short-term momentum. If you are this type of investor we would suggest you check out our Dynamic Momentum Indicator (Proprietary) ML Model.
Final Thoughts: How to Use This Information
This valuation model serves as a starting point for identifying potential investment opportunities. However, it should always be used alongside additional research.
Before making investment decisions, investors should consider:
- Industry trends and macroeconomic conditions
- Company-specific developments, such as earnings reports and management changes
- Broader market sentiment and investor behavior
Due Diligence Reminder:
👉 This valuation is based on all available data at the time of calculation. It is generated by an algorithm designed for deep-value, contrarian investors and does not constitute financial advice. Always conduct independent research and seek professional advice before investing.
