This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

5 Stocks Undervalued By Graham Number With Low Debt

James Dennin, Kapitall: The Graham Number is a great way to evaluate small-to-middle cap stocks, especially ones that you are concerned might be overvalued. With many analysts now saying the market is a better environment for selling rather than buying, it's getting harder and harder for investors to find a good deal.

[Read more from Kapitall: AMC: Everybody’s Watching]

The number itself is calculated by looking at the square root of Earnings per Share (EPS) multiplied by Book Value Per Share (BVPS) and 22.5, which is based on Grahams assertion that a Price-to-Earnings ratio should never be above 15 and a Price-to-Book ratio should not be over 1.5. 

Book value per share is an important metric to consider when looking at how a stock is performing in a given moment, because it looks at both inflow (assets coming in, such as retained earnings) and outflow (dividends and buy-backs). Graham's number attempts to quanitify what a stock is really worth by looking at BVPS alongside numbers that measure a stock's profitability, in light of its price. 

Granted, many have pointed out that Graham himself advocated using the number as part of a much more rigorous test, which would include looking at a company's debt and long-term performance. While many stocks showed up in a screen we ran for stocks trading below their Graham numbers (174), many of them had taken on far too much debt, or cost too much per share in order to really be considered undervalued.

For instance, the private equity firm Apollo Global Management (APO), was undervalued by Graham number in our screen and had a huge return on its equity last year (48.20%), but was borrowing tons of money relative to the equity it was bringing in (Long-term Debt to Equity: 12.11). Such a high debt level raises questions as to whether the firm is taking on too much risk in a bullish market. The case of Apollo also illustrates how the Graham number works in different industries. At the moment, private equity firms are likely to see a decline in book value in what they are viewing as a seller's market

To make sure that the stocks included in our screen would still hold under most (if not all of Graham's) specifications, we only included stocks with low debt levels, strong sales growth over the last 5 years and P/E ratios below 15. From an initial universe of 174 "undervalued" companies, we were able to narrow down that list to 4. 

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,039.49 +60.36 0.36%
S&P 500 1,992.37 +5.86 0.30%
NASDAQ 4,532.1040 +5.6220 0.12%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs