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Earlier this year, I spent some time dissecting Benjamin Graham's 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 looked at the stocks of the S&P 500 that met the ideal situation mentioned above. Currently, there are 68 companies in the index that meet these criteria. I will be making a CAPScall on these companies after comparing them to competitors and their current value in relation to their Graham numbers. Up next is regional bank BB&T (NYSE: BBT ) .
Who are they?
BB&T, based in North Carolina, is the 16th largest bank based on total assets, checking in with over $178 billion. Fellow Fool John Maxfield views it favorably, citing both its growing profitability and its above average dividend yield of 2.5%. Its dividend was boosted by 25% earlier this year after the bank successfully passed the required Fed stress tests, and it possesses some of the qualities that a certain Oracle of Omaha often looks at when valuing stocks.
What's it worth?
That said, there are currently two similarly sized banks that have more upside, but BB&T still has a bit of upside leading to its Graham valuation:
Book Value Per Share (mrq)
|Fifth Third Bancorp (Nasdaq: FITB )||$1.56||$14.56||$22.61||$15.18||48.9%|
|New York Community Bancorp (NYSE: NYB )||$1.10||$12.78||$17.78||$13.62||30.6%|
|M&T Bank (NYSE: MTB )||$5.57||$69.18||$93.11||$91.76||1.5%|
|US Bancorp (NYSE: USB )||$2.72||$17.45||$32.68||$34.04||(4%)|
Source: Yahoo! Finance and author's calculations.
Fifth Third followed the lead of some other regional banks in increasing its commercial loan portfolio, and still has plenty of room to grow -- and a "buy" rating to boot. New York Community Bank is a favorite of many investors and currently sports a dividend yield north of 7%, giving even more reason to give it some consideration.
M&T Bank was in the news recently for buying Hudson City Bancorp at a substantial premium, expanding its footprint from Connecticut to Virginia, a pretty wealth-laden territory. Finally, U.S Bancorp, despite trading at a premium to its Graham valuation, currently boasts an investment portfolio that lacks some of the riskiest investments, placing it in high esteem among some of the largest U.S. banks.
A stock's valuation, regardless of the method used, is but one thing to look at when evaluating a potential investment. With room to grow into its Graham number valuation, I will be placing a "thumbs up" over on my CAPS page in order to track this call and keep myself accountable. I'll also be adding BB&T to My Watchlist to stay up to date on anything that may cause me to change my opinion of the company.
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