By Rudi Filapek-Vandyck, Editor FNArena

Prelude: In April 2011, with the Australian share market experiencing yet another January-April rally, I compared index projections for the calendar year from equity strategists with consensus price targets for individual stocks (*). The result was quite revealing in that my research showed equity strategists were significantly more optimistic than price targets set by security analysts might suggest. One of the two had to be wrong. At the time I believed strategists were too optimistic. That proved to be the correct call.

As it turned out, market strategists were off the mark by some 1000 index points for both 2010 and for 2011, but they somehow regained their mojo in 2012 when equities put in a stellar performance once the depths of the euro-crisis had been left behind.

Fast forward nearly two years and equities are once again experiencing a solid rally. In Australia we've just finished the February (interim) reporting season and all stockbroking analysts have been busy updating forecasts and valuations and have adjusted prospective Price-Earnings (PE) multiples to the new, improved environment.

What can consensus price targets tell us this time?

At face value, the underlying message remains a positive one as the number of stocks in the ASX200 still trading below target remains significantly higher than those trading above target. The flipside is that stocks trading above target represent more index weight than those that don't.

It is no secret most of the funds have been flowing into industrials and financials paying solid, sustainable dividends, preferably fully franked. In the chase for dividends, these investors are less worried about immediate earnings and short-term valuations, which is exactly the picture that emerges from this research: stocks like Woolworths ((WOW)), Wesfarmers ((WES)), Telstra ((TLS)) and the Big Four Banks are all trading above consensus targets. What has happened during February is that analysts have been lifting their forecasts and valuations, but new price targets still haven't reached as high as to where share prices already are.

And yes, these shares remain in demand, regardless. So what we have is one particular part of the share market that is heavily in demand and present share prices are a reflection of this. It remains important to note this group remains a minority in the share market overall. Only 74 out of the ASX200 are trading above target with stocks such as Harvey Norman ((HVN)), Myer ((MYR)), Ten Network ((TEN)) and, yes, even David Jones ((DJS)) trading well above respective targets.

The majority of funds has gone towards stocks such as CommBank ((CBA)), Westpac ((WBC)), ANZ Bank ((ANZ)), National Australia Bank ((NAB)), Telstra, Woolworths, Wesfarmers and CSL ((CSL)); eight stocks out of the top eleven in Australia that make up more than 50% of index points for the ASX200. This is why the ASX200 is outperforming most indices elsewhere. This is also why a question mark (or two, three) can be placed behind how much risk appetite there really is out there? Remove the switch from term deposits into dividend paying stocks and there's a fair case to be made that overall index gains over the past year or so would have been a lot less.

How much less exactly remains anybody's guess but maybe the answer lies in the fact that one particular part of the share market is trading well, well below price targets: resources stocks. The top eleven in Australia is complemented by BHP Billiton ((BHP)), Woodside Petroleum ((WPL)) and Rio Tinto ((RIO)) and they are all below target. In the case of Rio Tinto in particular this should read: well below target.

Apart from any numbers and projections I can distil from my research, we have already located the big question marks for the Australian share market for the remainder of the year:

- How much further can these eight stocks push the index?
- At what point exactly will risk appetite become strong enough for investors to embrace the other side of the index?

If only 74 stocks are trading above consensus targets, this means the large majority in the ASX200 is still far from fully valued. The group of (so far) neglected stocks includes, as one would have assumed, a big chunk of the second and third tier mining and energy stocks, as well as services providers to these sectors. Stocks like Maverick Drilling and Exploration ((MAD)), Perseus ((PRU)), Lynas Corp ((LYC)) and AWE Ltd ((AWE)) are trading 40% or more below targets, while engineers and services providers NRW Holdings ((NWH)), Cardno ((CDD)) and Boart Longyear ((BLY)) are also trading at deep discounts vis-a-vis analysts' targets for these stocks.

In simple calculations of averages, stocks above target are, on average, some 7% too high, while stocks below target are on average trading at a discount of some 9%. The second group is about twice as large in size as the first, but the first group commands the direction of the index. There you have it: the folly of focusing too much on the ASX200 which in essence remains a direct derivative of the Big Four Banks, the four largest (and most popular) industrials and three resources stocks.

What all these calculations show is that wild projections about the ASX200 reaching for 5500 or even higher this year are not impossible. All we need to see happening is for the popular stocks to hold on to their gains, at the least, and for the laggards to start catching up. That's not to say share prices for the likes of CommBank and Woolworths cannot possibly rise any further. But Woolworths' dividend yield (forward looking, as always) has now fallen below 4% with the prospective PE at 18.9 while consensus EPS growth for FY14 doesn't reach higher than 5.6% at this point.

At the very least one has to acknowledge it is becoming more and more difficult to not label these stocks as fully valued, or even as expensive.

Resources stocks, on the other hand, are not only victim to the fact that on present forecasts virtually every metal might as well be facing a surplus this calendar year, the market is also still trying to assess what exactly is the outlook for iron ore and for gold. The fact that Chinese data to date suggest the weakest start to the new calendar year since 2009 isn't exactly helping either. Same for forecasts the USD is looking towards a stronger time ahead.

FNArena's R-Factor, which ranks ASX200 stocks relative against each other on the basis of growth forecasts, PE ratios and dividend yield, shows (how unsurprisingly) a similar picture with the Top Ten of relatively cheapest valuations adhered to: Regis Resources ((RRL)), Arrium ((ARI)), Kingsgate Consolidated ((KCN)), Emeco ((EHL)), UGL ((UGL)), Pacific Brands ((PBG)), Cabcharge Australia ((CAB)), Bank of Queensland ((BOQ)), Bradken ((BKN)) and Ausdrill ((ASL)). It goes without saying these stocks all come with an above average risk tag attached, which is why they are at the bottom of the valuation ladder, but big gains are on offer from the moment fortunes turn for the better.

This week FNArena will also publish a new update of its Australian Super Stock Report and, ranked according to broker ratings (FNArena Sentiment Indicator), the Top Ten of most highly recommended stocks in the share market now has Whitehaven Coal ((WHC)) at its top, indicating stockbrokers believe share price weakness has become too much, too far. The rest of the Top Ten consist of (in order): Air New Zealand ((AIZ)), Skilled Group ((SKE)), Gryphon Minerals ((GRY)), Beadell Resources ((BDL)), Flexigroup ((FXL)), OceanaGold ((OGC)), Santos ((STO)) and Rio Tinto ((RIO)).

All in all, what today's update on the basis of consensus price targets also shows is that investors do not necessarily have to slide down into high risk territory to still find reasonable value in the share market. As I have written earlier, picking stocks that should have good growth ahead over the next three to five years still looks like an appropriate investment approach. On this basis, stocks including Amcor ((AMC)), McMillan Shakespeare ((MMS)), ResMed ((RMD)) and Ardent Leisure ((AAD)), among others, still look good candidates for inclusion in longer term investment portfolios.

Above all, what today's analysis of price targets shows is this share market can potentially run a lot further still and individual shares certainly can. That's one major difference from the conclusions drawn in April 2011.

(This story was written on Monday, 11th March 2013. It was published on that day in the form of an email to paying subscribers).

(*) Subscribers can view the story from 4th April 2011, titled "How Much Upside Is There?"

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(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's - see disclaimer on the website)

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Rudi On Tour in 2013