Do you consider yourself a value investor? Do you like to shop for bargains?
Stocks trade in much the same way as anything -- some are sold at better prices than others. Some offer more value for their price, and some are too expensive (or "overpriced").
One idea on how to find stocks trading at attractive prices is to use the Graham equation, which was created by the "godfather of value investing" Benjamin Graham. The equation calculates the maximum fair value for a stock, and stocks trading at significant discounts to their "Graham number" may be undervalued.
The Graham Number = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share). This equation assumes that a stock is overvalued if P/E is over 15 or P/BV is over 1.5.
Sell side analysts
To add another dimension to this method, it helps to find stocks that not only appear undervalued, but also have the optimism of sell side analysts.
Sell side analysts work at banks and produce research that is given to brokerage clients for their investment considerations. When the research comes from a reliable analyst, a report can have a big effect on a stock's share price. Their ratings usually come in the form of "Buy" or "Sell," or "Overweight" or "Underweight."
Business section: Investing ideas
To illustrate these ideas, we ran a screen on stocks with current "Buy" ratings from analysts at UBS for those that are also undervalued relative to their Graham Number.
These stocks appear undervalued, and analysts at UBS are optimistic on their outlooks -- do you agree with their optimism? Or are these stocks not the good bargains they appear to be?
List sorted alphabetically. (Click here to access free, interactive tools to analyze these ideas.)
1. Fifth Third Bancorp
2. Georgia Gulf
3. The Goldman Sachs Group
4. State Street
5. TCF Financial
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Alexander Crawford does not own any of the shares mentioned above. Data sourced from Yahoo! Finance.
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