One way to discern whether or not a stock is undervalued is by looking at its Graham Number. Named for pioneer investor Benjamin Graham, the Graham Number is calculated by taking the square root of a company's Earnings per Share (EPS) and Book Value per Share (BVPS) multiplied by 22.5. Any stock whose listed price is below its Graham Number might be said to be undervalued.
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Earnings per share is one of the most important variables that affects share price. It is determined by looking at net income divided by the number of shares a company sells, and is one of the most basic indicators of a company's profitability. A company's BVPS is a per share estimate of the company's equity.
Investors should keep in mind the Graham Number is a very conservative way of looking at stocks; it will not apply to companies that are leveraged and it doesn't take the magnitude of a company's growth into consideration. A final liability of the Graham Number is that it does not always apply to larger cap stocks - which may already exceed their Graham Number but are still reliable investments. That being said, it is a good indicator of what the upper bound of a stock's price range will be, and a good way to screen for the potential risk associated with low-cap stocks. Value investors often seek out companies that combine a low Graham Number with a record of strong financials and growth. This can even include reputable companies who have just posted losses, unveiled disastrous new products, or corroborated rumored scandals.
To create the list below, we ran a screen for undervalued stocks trading at prices substantially lower than their Graham Number, in this case by at least 38%.
Dig Deeper: Compare analyst ratings to annual returns for stocks mentioned
Click on the image below for ratings over time. Analyst ratings sourced from Zacks Investment Research.Are these stocks undervalued, or are these companies in trouble? Use the list below to begin your own analysis.
1.Fidelity National Financial, Inc. ( FNF ): Provides title insurance, mortgage services, specialty insurance, and information services in the United States. Market cap at $5.51B, most recent closing price at $24.49.Diluted TTM earnings per share at 2.73, and a MRQ book value per share value at 19.09, implies a Graham Number fair value = sqrt(22.5*2.73*19.09) = $34.24. Based on the stock's price at $24.49, this implies a potential upside of 39.83% from current levels. 2.Geeknet, Inc. ( GKNT): Operates as an online network for the global geek community comprising technology professionals, technology enthusiasts, and general consumers of technology-oriented goods, services, and media. Market cap at $103.2M, most recent closing price at $15.67. Diluted TTM earnings per share at 2.1, and a MRQ book value per share value at 10.15, implies a Graham Number fair value = sqrt(22.5*2.1*10.15) = $21.90. Based on the stock's price at $15.67, this implies a potential upside of 39.75% from current levels. 3.Arrow Electronics, Inc. ( ARW): Distributes products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions worldwide. Market cap at $4.55B, most recent closing price at $42.97. Diluted TTM earnings per share at 4.29, and a MRQ book value per share value at 37.17, implies a Graham Number fair value = sqrt(22.5*4.29*37.17) = $59.90. Based on the stock's price at $42.97, this implies a potential upside of 39.4% from current levels. 4.Wilshire Bancorp Inc. ( WIBC): Operates as the holding company for Wilshire State Bank that offers a range of financial products and services. Market cap at $598.89M, most recent closing price at $8.40. Diluted TTM earnings per share at 1.22, and a MRQ book value per share value at 4.96, implies a Graham Number fair value = sqrt(22.5*1.22*4.96) = $11.67. Based on the stock's price at $8.4, this implies a potential upside of 38.91% from current levels.