Interested in finding potentially undervalued stocks? If so, you may consider yourself among the "value investors," those who search for stocks that they believe are trading below their fair value. The assumption is that eventually the stock price will rise to match its fair value, generating a handsome profit.
We began by searching for stocks that are technically "oversold," meaning their momentum and volume trends indicate that downward price movement may be slowing down.
To do this we used the Relative Strength Index, or RSI, which measures the speed and change of price movements. It is often used as a momentum indicator, with a reading that ranges from 0 to 100.
In general: RSI(14) above 70 signal the stocks are overbought (i.e., prices might soon decline), and RSI(14) below 30 signal the stocks are oversold (i.e., prices might soon rebound). In this article we look at oversold stocks with RSI(14) below 40.
Undervalued by Graham
Benjamin Graham, a former mentor of Warren Buffett and the so-called "Godfather" of value investing, created the Graham Number as a calculation for the maximum fair-value price of a stock. It is based on its earnings per share (EPS) and book value per share, and stocks trading significantly below their Graham Number are considered to be possibly undervalued.
The Graham Number = Square Root of (22.5) x (TTM EPS) x (MRQ Book Value per Share).
Business section: Investing ideas
We started to screen for stocks that have an RSI(14) below 40. Then we screened for those trading well below their Graham numbers to find those that may be undervalued.
Do you think these stocks are undervalued? (Click here to access free, interactive tools to analyze these ideas.)
1. Tyson Foods: Engages in the production, distribution, and marketing of chicken, beef, pork, and prepared food products, as well as related allied products worldwide. RSI(14) at 39.77. Diluted TTM earnings per share at 1.61, and a MRQ book value per share value at 15.67, implies a Graham Number fair value = sqrt(22.5*1.61*15.67) = $23.83. Based on the stock's price at $18.94, this implies a potential upside of 25.79% from current levels.
2. Carnival (NYSE: CCL): Operates as a cruise and vacation company. RSI(14) at 39.16. Diluted TTM earnings per share at 2.42, and a MRQ book value per share value at 30.67, implies a Graham Number fair value = sqrt(22.5*2.42*30.67) = $40.87. Based on the stock's price at $30.5, this implies a potential upside of 33.98% from current levels.
3. Constellation Energy Group (NYSE: CEG): Operates as an energy company in the United States and Canada. RSI(14) at 38.92. Diluted TTM earnings per share at 2.01, and a MRQ book value per share value at 39.54, implies a Graham Number fair value = sqrt(22.5*2.01*39.54) = $42.29. Based on the stock's price at $36.27, this implies a potential upside of 16.59% from current levels.
4. Ameren: Operates as a public utility company in Missouri and Illinois, the United States. RSI(14) at 38.64. Diluted TTM earnings per share at 2.27, and a MRQ book value per share value at 33.02, implies a Graham Number fair value = sqrt(22.5*2.27*33.02) = $41.07. Based on the stock's price at $31.05, this implies a potential upside of 32.26% from current levels.
5. Alamo Group (NYSE: ALG): Provides equipment and related replacement parts for maintenance and agriculture. RSI(14) at 38.49. Diluted TTM earnings per share at 2.41, and a MRQ book value per share value at 23.15, implies a Graham Number fair value = sqrt(22.5*2.41*23.15) = $35.43. Based on the stock's price at $28.58, this implies a potential upside of 23.97% from current levels.
6. BOK Financial: A financial holding company, offers a range of financial products and services to commercial and industrial customers, and other financial institutions and consumers. RSI(14) at 36.22. Diluted TTM earnings per share at 4.17, and a MRQ book value per share value at 40.36, implies a Graham Number fair value = sqrt(22.5*4.17*40.36) = $61.54. Based on the stock's price at $52.34, this implies a potential upside of 17.57% from current levels.
7. Entergy (NYSE: ETR): Operates as an integrated energy company in the United States. RSI(14) at 36.19. Diluted TTM earnings per share at 7.55, and a MRQ book value per share value at 50.8, implies a Graham Number fair value = sqrt(22.5*7.55*50.8) = $92.90. Based on the stock's price at $67.9, this implies a potential upside of 36.81% from current levels.
8. Newpark Resources (NYSE: NR): And its subsidiaries provide fluids management, waste disposal, and well site preparation products and services primarily to the oil and gas exploration and production industry. RSI(14) at 35.49. Diluted TTM earnings per share at 0.73, and a MRQ book value per share value at 5.22, implies a Graham Number fair value = sqrt(22.5*0.73*5.22) = $9.26. Based on the stock's price at $7.94, this implies a potential upside of 16.62% from current levels.
9. Education Management: Provides post-secondary education in North America. RSI(14) at 28.2. Diluted TTM earnings per share at 1.5, and a MRQ book value per share value at 16.8, implies a Graham Number fair value = sqrt(22.5*1.5*16.8) = $23.81. Based on the stock's price at $18.85, this implies a potential upside of 26.32% from current levels.
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 Rebecca Lipman does not own any of the shares mentioned above. Data sourced from Finviz.
