If you're unsure of whether or not a stock is worth purchasing, it might be helpful to have the backup of a large investment bank's analysts. It's their full-time job to analyze companies, so their word is as professional as it gets.
Furthermore, if the company is undervalued, it could imply that the stock has a large upside. When looking for undervalued companies, the Graham Number, one of Benjamin Graham's famous valuations, can be incredibly helpful.
The Graham Number is a measure of a stock's maximum fair value created by the "Godfather of value investing," Benjamin Graham. The number is based on a stock's EPS and book value per share (BVPS):
Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)
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.
Business section: Investing ideas
Below is a screen using the information above. We wanted to have the "buy" ratings backing of a large investment bank, so we chose UBS.
With their ratings encouragement, we proceeded with the Graham Number.
Do you think UBS is right about these undervalued stocks?
List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)
1. BB&T
2. Allstate (NYSE: ALL): Engages in the personal property and casualty insurance, life insurance, retirement, and investment products businesses primarily in the United States. Market cap at $16.75B, most recent closing price at $34.09. On 08/10/2011, UBS had a Buy rating on the stock. 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.
3. City National: Operates as the bank holding company for City National Bank that provides a range of banking, investing, and trust services to small to mid-sized businesses, entrepreneurs, professionals, and affluent individuals. Market cap at $2.51B, most recent closing price at $47.04. On 11/08/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 3.33, and a MRQ book value per share value at 41.77, implies a Graham Number fair value = sqrt(22.5*3.33*41.77) = $55.94. Based on the stock's price at $47.27, this implies a potential upside of 18.35% from current levels.
4. Dana Holding
5. FirstMerit
6. JetBlue Airways
7. Umpqua Holdings: Operates as the bank holding company for Umpqua Bank that provides commercial and retail banking services to corporate, institutional, and individual customers primarily in the areas of Oregon, northern California, and Washington. Market cap at $1.37B, most recent closing price at $12.23. On 11/08/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 0.76, and a MRQ book value per share value at 15.08, implies a Graham Number fair value = sqrt(22.5*0.76*15.08) = $16.06. Based on the stock's price at $12.17, this implies a potential upside of 31.95% from current levels.
8. Wintrust Financial: Engages in community banking, specialty finance, and wealth management operations. Market cap at $1.2B, most recent closing price at $33.0. On 11/08/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 1.81, and a MRQ book value per share value at 41.65, implies a Graham Number fair value = sqrt(22.5*1.81*41.65) = $41.18. Based on the stock's price at $32.38, this implies a potential upside of 27.19% 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 Danny Guttridge does not own any of the shares mentioned above.
