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I spent the last week dissecting The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.
However, a quick check can help determine whether or not a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. With that in mind, I screened the stocks of the S&P 500 that met those requirements and was presented with 56 companies. I will be making a CAPScall on most of these companies after comparing them to competitors, and their current values to their Graham numbers. Up next is regional bank leader Huntington Bancshares (Nasdaq: HBAN ) .
Who are they?
Huntington Bancshares is one of many regional banks located in the Midwest. Based in Ohio, the bank spent most of 2011 recovering from damage sustained in the 2008 financial crisis. It has a nice dividend, currently yielding around 2.7%, with plenty of room to grow. It is a favorite of our banking expert, Anand Chokkavelu, and is a part of his Rising Star portfolio.
What's it worth?
If you compare Huntington to peers of similar market cap, it isn't the only one that comes in under its current Graham number:
Book Value Per Share (MRQ)
|New York Community Bancorp (NYSE: NYB )||$1.09||$12.73||$17.67||$13.08|
|People's United Financial (Nasdaq: PBCT )||$0.57||$14.99||$13.87||$12.72|
|KeyCorp (NYSE: KEY )||$0.87||$10.09||$14.05||$8.10|
Source: Yahoo! Finance and author's calculations. TTM = Trailing 12 months. MRQ = Most recent quarter.
All of the banks on this list look undervalued based on their Graham numbers, which is understandable. The financial industry was hit hard as a whole in the 2008 financial crisis that resulted in a government bailout. That said, it might be worth taking a further look at all of them. New York Community has a yield approaching 8% and currently trades for just over book value. People's United also sports an attractive yield -- right around 5% -- and recently expanded its operations into the state of New York with the acquisition of 56 branches from Citizens Financial Group. Finally, KeyCorp, which is also a part of Anand's portfolio, was in the news recently for publicly opposing the Volcker Rule placed on banks. Nevertheless, its above-average performance could make it an interesting choice among smaller banks.
All that said, based primarily on the gap between its current price and its Graham number, as well as the continuing recovery of financial stocks, I will be maintaining my "thumbs up" on Huntington over at my CAPS page in order to track this call and keep myself accountable.
Huntington Bancshares may not be the only opportunity to profit off of regional banks. Many investors are interested in bank stocks, including Warren Buffett himself. Our special report "The Only Stocks the Smartest Investors are Buying" explains why Buffett would buy one bank in particular, were he a smaller investor. Click here to get your free copy today.