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Is This Bank Cheap According to Graham?

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I recently spent some time 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 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 value in relation to their Graham numbers. Up next is money center bank KeyCorp (NYSE: KEY  ) .

Who are they?
KeyCorp is a Cleveland-based bank, offering community banking services in 14 states under the KeyBank name. They joined megabank JPMorgan Chase and 13 other banks in passing Federal Reserve stress tests on Tuesday, announcing a $344 million share buyback, causing its share price to rise over 5% from Monday's close. It publicly opposed the Volcker Rule requirements on banks, stating that they would place an expensive burden on smaller banks. Nevertheless, while it isn't a holding of Berkshire Hathaway's portfolio, it does share some of the characteristics of what Warren Buffett looks for when investing in companies.

What's it worth?
When compared to other financial companies of similar market cap, it is among the cheaper banks, including previously profiled Huntington Bancshares (Nasdaq: HBAN  ) :



Book Value Per Share (MRQ)

Graham Number

Recent Price

KeyCorp $0.87 $10.09 $14.05 $8.26
Comerica (NYSE: CMA  ) $2.09 $34.81 $40.46 $31.76
New York Community Bancorp (NYSE: NYB  ) $1.09 $12.73 $17.67 $13.27
Huntington Bancshares $0.59 $5.82 $8.79 $6.09
SLM (Nasdaq: SLM  ) $1.18 $9.20 $15.63 $16.57

Source: Yahoo! Finance and author's calculations.

Only SLM, better known as Sallie Mae, currently trades above its current Graham number. Quarterly earnings for the education lender were down slightly from the same period in 2010, but a healthy dividend yield near 3% make it a popular pick in a well-known hedge fund. Comerica rode record deposits to a strong 2011, returning 47% of income to shareholders through dividends and share buybacks. New York Community currently sports one of the higher dividends in the banking industry, with a yield approaching 8%. Huntington Bank currently yields a modest 2.7%, but has room to grow its dividend, making it a favorite among banks.

Accountability time
As another smaller bank with some room to grow, KeyCorp joins Huntington Bancshares and Fifth Third Bancorp as a bank that will continue to improve along with rest of the financial sector. Therefore, I will be placing a thumbs-up over on my CAPS page in order to track this call and keep myself accountable. I will also be adding KeyCorp to My Watchlist to stay up to date on anything that may cause me to change my opinion of the company.

KeyCorp may not be the only opportunity to profit off of smaller 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.

Fool contributor Robert Eberhard owns shares in Berkshire Hathaway. Click here to see his holdings and a short bio or follow him on Twitter. The Motley Fool owns shares of JPMorgan Chase, Huntington Bancshares, Key, Berkshire Hathaway, and Fifth Third Bancorp. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. 

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 14, 2012, at 9:52 PM, 1caflash wrote:

    Robert, thanks for writing. One of my largest stock positions is in NYB. I hope it does well, but this bank holding company finds itself in a hyphenation situation, stunting its growth. What do I mean? Dodd-Frank.

  • Report this Comment On March 17, 2012, at 1:13 AM, 9Elle wrote:

    From Ben Graham's 1934 _Security


    "The securities analyst, in discharging his function of investment counselor, should do his best to discourage the purchase of stocks of banking and insurance institutions by the ordinary small investor."


    "The fact that the operations of financial institutions generally — such as investment trusts, banks, and insurance companies — must necessarily reflect changes in security values, makes their shares a dangerous medium for widespread public dealings. Since in these enterprises an increase in security values may be held to be part of the year's profits, there is an inevitable tendency to regard the gains made in good times as part of the "earning power," and to value the shares accordingly. This results of course in an absurd overvaluation, to be followed by collapse and a correspondingly excessive depreciation. Such violent fluctuations are particularly harmful in the case of financial institutions because they may affect public confidence. It is true also that rampant speculation (called 'investment') in bank and insurance-company stocks leads to the ill-advised launching of new enterprises, to the unwise expansion of old ones, and to a general relaxation of established standards of conservatism and even to probity."

    Graham's _The Intelligent Investor_ is a bit more generous, due arguably to the changing times (read: greater bank regulation). See article at

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