All believers in value investing have one man to thank: Benjamin Graham, the father of the movement and mentor to the one and only Warren Buffet. One of Graham's legacies is the indicator he created to evaluate the potential of stocks, the Graham Number.
Aimed at cautious investors, the Graham Number takes into account a stock's earnings per share and book value per share to evaluate the true potential of an asset. Any stock that is priced below the Graham Number as indicated by the formula is considered undervalued and a good buy. However, it would be prudent to take into account other indicators as well, as this number does not account for a numerous other investment factors in measuring the health of a stock, and it tends to prove more accurate for small-cap stocks.
Business section: Investing ideas
The Graham Number = Square Root of (22.5) x (TTM EPS) x (Most recent quarter Book Value per Share).
We use trailing 12 month (TTM) diluted EPS. Trailing 12 months (TTM) is an indication that the calculated data has come from the last 12 months. The equation assumes that P/E should not be higher than 15, and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued
We started with companies with price to sales ratios below 2, then screened those names using the Graham Number. We list the top 15 by P/S ratio below.
Do you think these names should be trading higher? (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. Market cap at $6.8B, most recent closing price at $18.59.Price to Sales ratio at 0.2. Diluted TTM earnings per share at 1.63, and a MRQ book value per share value at 16.16, implies a Graham Number fair value = sqrt(22.5*1.63*16.16) = $24.34. Based on the stock's price at $18.68, this implies a potential upside of 30.33% from current levels.
2. Whirlpool (NYSE: WHR): Engages in the manufacture and marketing of home appliances worldwide. Market cap at $4.42B, most recent closing price at $57.27.Price to Sales ratio at 0.24. Diluted TTM earnings per share at 3.99, and a MRQ book value per share value at 56.56, implies a Graham Number fair value = sqrt(22.5*3.99*56.56) = $71.26. Based on the stock's price at $57.81, this implies a potential upside of 23.26% from current levels.
3. Hartford Financial Services Group (NYSE: HIG): Provides insurance and financial services in the United States and internationally. Market cap at $7.1B, most recent closing price at $16.10.Price to Sales ratio at 0.31. Diluted TTM earnings per share at 0.45, and a MRQ book value per share value at 46.99, implies a Graham Number fair value = sqrt(22.5*0.45*46.99) = $21.81. Based on the stock's price at $16.18, this implies a potential upside of 34.81% from current levels.
4. Humana: Offers various health and supplemental benefit plans in the United States. Market cap at $12.58B, most recent closing price at $77.12.Price to Sales ratio at 0.34. Diluted TTM earnings per share at 8.1, and a MRQ book value per share value at 50.46, implies a Graham Number fair value = sqrt(22.5*8.1*50.46) = $95.90. Based on the stock's price at $75.9, this implies a potential upside of 26.35% from current levels.
5. Dell (Nasdaq: DELL): Provides integrated technology solutions in the information technology (IT) industry worldwide. Market cap at $21.07B, most recent closing price at $12.0.Price to Sales ratio at 0.35. Diluted TTM earnings per share at 1.75, and a MRQ book value per share value at 5.31, implies a Graham Number fair value = sqrt(22.5*1.75*5.31) = $14.46. Based on the stock's price at $12.07, this implies a potential upside of 19.8% from current levels.
6. Alcoa (NYSE: AA): Engages in the production and management of aluminum, fabricated aluminum, and alumina. Market cap at $8.95B, most recent closing price at $8.39.Price to Sales ratio at 0.36. Diluted TTM earnings per share at 0.37, and a MRQ book value per share value at 13.21, implies a Graham Number fair value = sqrt(22.5*0.37*13.21) = $10.49. Based on the stock's price at $8.3, this implies a potential upside of 26.35% from current levels.
7. Jacobs Engineering Group: Provides professional, technical, and construction services. Market cap at $4.44B, most recent closing price at $34.40.Price to Sales ratio at 0.42. Diluted TTM earnings per share at 2.8, and a MRQ book value per share value at 27.5, implies a Graham Number fair value = sqrt(22.5*2.8*27.5) = $41.62. Based on the stock's price at $34.95, this implies a potential upside of 19.09% from current levels.
8. Allstate: Engages in the personal property and casualty insurance, life insurance, retirement, and investment products businesses primarily in the United States. Market cap at $16.22B, most recent closing price at $33.01.Price to Sales ratio at 0.49. Diluted TTM earnings per share at 2.01, and a MRQ book value per share value at 38.91, implies a Graham Number fair value = sqrt(22.5*2.01*38.91) = $41.95. Based on the stock's price at $33.07, this implies a potential upside of 26.85% from current levels.
9. Cigna: Operates as a health service organization. Market cap at $12.3B, most recent closing price at $42.65.Price to Sales ratio at 0.53. Diluted TTM earnings per share at 4.62, and a MRQ book value per share value at 29.71, implies a Graham Number fair value = sqrt(22.5*4.62*29.71) = $55.57. Based on the stock's price at $42.58, this implies a potential upside of 30.51% from current levels.
10. Harman International Industries: Engages in the development, manufacture, and marketing of audio products and electronic systems primarily in the United States, Germany, and other parts of Europe. Market cap at $2.7B, most recent closing price at $38.29.Price to Sales ratio at 0.64. Diluted TTM earnings per share at 4.14, and a MRQ book value per share value at 23.5, implies a Graham Number fair value = sqrt(22.5*4.14*23.5) = $46.79. Based on the stock's price at $38.01, this implies a potential upside of 23.09% from current levels.
11. General Dynamics: Provides business aviation, combat vehicles, weapons systems and munitions, military and commercial shipbuilding, and communications and information technology products and services worldwide. Market cap at $22.34B, most recent closing price at $61.96.Price to Sales ratio at 0.69. Diluted TTM earnings per share at 6.8, and a MRQ book value per share value at 38.42, implies a Graham Number fair value = sqrt(22.5*6.8*38.42) = $76.67. Based on the stock's price at $62.72, this implies a potential upside of 22.24% from current levels.
12. Pepco: Engages in the transmission, distribution, and supply of electricity. Market cap at $4.4B, most recent closing price at $19.27.Price to Sales ratio at 0.79. Diluted TTM earnings per share at 1.15, and a MRQ book value per share value at 19.13, implies a Graham Number fair value = sqrt(22.5*1.15*19.13) = $22.25. Based on the stock's price at $19.24, this implies a potential upside of 15.64% from current levels.
13. Entergy: Operates as an integrated energy company in the United States. Market cap at $11.44B, most recent closing price at $64.54.Price to Sales ratio at 1.04. Diluted TTM earnings per share at 5.32, and a MRQ book value per share value at 50.32, implies a Graham Number fair value = sqrt(22.5*5.32*50.32) = $77.61. Based on the stock's price at $64.35, this implies a potential upside of 20.61% from current levels.
14. Boston Scientific: Develops, manufactures, and markets medical devices used in various interventional medical specialties worldwide. Market cap at $7.99B, most recent closing price at $5.59.Price to Sales ratio at 1.05. Diluted TTM earnings per share at 0.34, and a MRQ book value per share value at 7.95, implies a Graham Number fair value = sqrt(22.5*0.34*7.95) = $7.80. Based on the stock's price at $5.61, this implies a potential upside of 39.01% from current levels.
15. CenterPoint Energy (NYSE: CNP): Operates as a public utility holding company in the United States. Market cap at $8.45B, most recent closing price at $19.78.Price to Sales ratio at 1.07. Diluted TTM earnings per share at 3.16, and a MRQ book value per share value at 10.03, implies a Graham Number fair value = sqrt(22.5*3.16*10.03) = $26.70. Based on the stock's price at $19.97, this implies a potential upside of 33.72% 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.
Disclosure: Kapitall's Dan Connelly does not own any of the shares mentioned above. EPS and BVPS data sourced from Yahoo! Finance, all other data sourced from Finviz.
