James Dennin, Kapitall: We screened stocks under 5 dollars using the Graham Number for all you value investors out there.
Stocks were slightly down this morning after a strong rally over the last week. Trading spiked in the S&P 500 as it seemed like a record five days of straight gains was drawing to a close. Part of the problem today stems from lukewarm earnings reports from major firms like
[Read more about deals under $5 from Kapitall here.]
Considering the volatility in the markets over the last month or so, we decided to run a screen for growth stocks that might make good value investments.
Value investors often look for stocks that are trading down after bad news causes a temporary deflation in the stock price. Value investments are typically stocks expected to rise in fair value, and there are numerous ways to determine whether a stock will go up.
One way to do so is by determining the stock's Graham Number.
Benjamin Graham was one of Wall St.'s greatest thinkers. After graduating from Columbia University, at the age of 20, he had offers to join the college from
different departments: English, Mathematics, and Philsosophy. However he decided to take a job on Wall Street where he excelled. Graham believed in studying a company's balance sheet to find an "intrinsic value," and only investing if that value was higher than the current price.
Things have gotten a lot easier since Benjamin Graham's day. We now have a measurement for the so-called "intrinsic value" of a stock. And while it's a rough approximation, it is still built using Graham's favorite parameters:
book value per share
earnings per share
(EPS), and the
price to equity ratio
To calculate a stock's Graham number we use the following formula:
Graham Number = Square Root of [ (22.5) x (Earnings Per Share) x (Book Value Per Share) ].
It's important to remember however that the Graham Number is still an estimate. Book value per share looks at a company's revenue, debt, and costs to determine something close to a "fair value," but you should never invest in a stock based on this number alone.