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Investing 101: Rallying Large Caps Undervalued by the Graham Number

By Kapit all - Updated Apr 7, 2017 at 5:11PM

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How the Graham number can help you.

Do you prefer searching for stocks that you believe are trading below their fair value? If so, you may identify with the term "value investor." These investors search for undervalued stocks with the hope that these names will rise to their fair value in the near future.

For ideas on how to search for potentially undervalued names, we ran a screen on the large-cap sector. We began by screening for stocks with market caps above $10 billion, and then for those that are currently rallying above their 20-day, 50-day, and 200-day moving averages.

Finally, we screened for those that appear undervalued relative to their Graham number. This is a measure of maximum fair value created by the "godfather of value investing," Benjamin Graham. It is based on a stock's earnings per share and book value per share:

Graham number = Square Root of (22.5 x Trailing-12-Month EPS x Most-Recent-Quarter BVPS)

The equation assumes that the P/E ratio should not be higher than 15 and the P/BV ratio should not be higher than 1.5. Stocks trading well below their Graham number, or their maximum fair value, may be undervalued. This could indicate that the stocks have more value to price in.

Business section: Investing ideas
Here are the stocks that resulted from this screen. These large-cap names have upward momentum, indicated by trading above their 20-day, 50-day, and 200-day moving averages. These names also appear undervalued relative to their Graham numbers.

Do you think these stocks have more value to price in?

Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

1. Archer Daniels Midland (NYSE: ADM): Procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally. Its market cap is $21 billion. The stock is currently trading 0.96% above its 20-day moving average, 4.16% above its 50-day MA, and 10.35% above its 200-day MA. Diluted TTM earnings per share of $2.27 and a MRQ book value per share value of $27.16 imply a Graham number fair value of $37.25. Based on the stock's price at $31.87, this implies a potential upside of 16.87% from current levels.

2. Ameriprise Financial: Provides financial planning, products, and services primarily in the United States. Its market cap is $12.53 billion. The stock is currently trading 1.40% above its 20-day moving average, 4.11% above its 50-day MA, and 16.78% above its 200-day MA. Diluted TTM earnings per share of $4.37 and a MRQ book value per share value of $46.21 imply a Graham number fair value of $67.41. Based on the stock's price at $57.27, this implies a potential upside of 17.7% from current levels.

3. Discover Financial Services (NYSE: DFS): Operates as a credit card issuer and electronic payment services company primarily in the United States. Its market cap is $17.22 billion. The stock is currently trading 9.99% above its 20-day moving average, 16.76% above its 50-day MA, and 34.06% above its 200-day MA. Diluted TTM earnings per share of $4.06 and a MRQ book value per share value of $15.59 imply a Graham number fair value of $37.74. Based on the stock's price at $31.86, this implies a potential upside of 18.45% from current levels.

4. Fifth Third Bancorp (Nasdaq: FITB): Operates as a diversified financial services holding company in the United States. Its market cap is $12.96 billion. The stock is currently trading 2.03% above its 20-day moving average, 3.56% above its 50-day MA, and 17.61% above its 200-day MA. Diluted TTM earnings per share of $1.18 and a MRQ book value per share value of $13.92 imply a Graham number of $19.22. Based on the stock's price at $14.5, this implies a potential upside of 32.58% from current levels.

5. PNC Financial Services Group: Operates as a diversified financial services company. Its market cap is $33.03 billion. The stock is currently trading 4.23% above its 20-day moving average, 4.67% above its 50-day MA, and 15.93% above its 200-day MA. Diluted TTM earnings per share of $5.64 and a MRQ book value per share value of $61.51 imply a Graham number fair value of $88.35. Based on the stock's price at $63.49, this implies a potential upside of 39.15% from current levels.

6. State Street (NYSE: STT): Provides various financial services and products to the institutional investors worldwide. It has a market cap of $21.96 billion. The stock is currently trading 5.64% above its 20-day moving average, 9.17% above its 50-day MA, and 16.32% above its 200-day MA. Diluted TTM earnings per share of $3.79 and a MRQ book value per share value of $38.77 imply a Graham number fair value of $57.50. Based on the stock's price at $45.9, this implies a potential upside of 25.27% from current levels.

7. Wells Fargo (NYSE: WFC): Provides retail, commercial, and corporate banking services primarily in the United States. It has a market cap of $175.92 billion. The stock is currently trading 4.37% above its 20-day moving average, 8.50% above its 50-day MA, and 24.00% above its 200-day MA. Diluted TTM earnings per share of $2.82 and a MRQ book value per share value of $24.65 imply a Graham number fair value of $39.55. Based on the stock's price at $34.32, this implies a potential upside of 15.23% 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 Alexander Crawford does not own any of the shares mentioned above. The Motley Fool owns shares of PNC Financial Services Group and Fifth Third Bancorp. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$45.94 (1.52%) $0.69
Archer-Daniels-Midland Company Stock Quote
Archer-Daniels-Midland Company
ADM
$86.60 (2.92%) $2.46
Fifth Third Bancorp Stock Quote
Fifth Third Bancorp
FITB
$37.49 (1.11%) $0.41
State Street Corporation Stock Quote
State Street Corporation
STT
$74.93 (1.93%) $1.42
Discover Financial Services Stock Quote
Discover Financial Services
DFS
$109.60 (1.00%) $1.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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