Our Dividend Valuation Model suggests that United Technologies (UTX) may be as much as 17% undervalued. The chart at the left shows this undervalued condition in the price (red line) being much lower than the current value (blue bars).
Additionally, the models suggests that UTX is undervalued nearly 30% (blue checkered bar) when we input our dividend and interest rate estimates for next year. The chart shows that one would have to go back to 1998 to find UTX as undervalued as it is today.
Undervaluation is not a term that means much to speculators and traders in today's market. Indeed, recent data from the CBOE puts the Correlation Index at nearly 80. This means that the average stock in the S&P 500 is now nearly 80% correlated to the movement of the Index itself, thus discounting almost all individual company fundamentals. According to Bloomberg, this is the highest Correlation Index since 1987.
So what does it all mean? Worries about european defaults, political stalemate in Washington DC, and slowing US and european economic growth have turned almost all big US stocks into commodities. Most are acting about like their underlying index. Not only are the daily price movements of United Technologies (UTX) and Boeing (BA) highly correlated, as you might expect from companies in the same sector, but also the price movements of UTX, General Mills (GIS), and Walmart (WMT) are also moving together. As the old timers would say, we now have a stock market instead of a market of stocks.
You will note that the last time the Correlation Index was this high was during 1987 when all stocks shot higher for the first six months of the year, and then all fell like a rock over the last six months of the year. They all went in the same direction, regardless of their diverse underlying prospects.
I said in 1987 that the stock market had lost its mind, and I still believe it. I believe history will show that today's congealed group think will be proved just as wrong.
Companies like United Technologies have huge free cash flows, lots of cash, and firm orders for future business. It would not surprise me to see UTX trading near our model's target price of $95 per share in the next 12 months. Indeed, I think the odds of UTX rising 30% over the next year are much higher than the odds of it falling 30%. The main reason is they are a financially strong, innovative, and decisively managed company. They can handle whatever is thrown at them. There are untold companies that are bouncing up and down just like UTX that cannot make the same claim.