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Are you looking for investing ideas during earnings season?

We found around 240 companies from the S&P500 index reporting earnings in February. We screened that universe for those that appear undervalued relative to the Graham Number. The Graham Number is a measure of maximum fair value created by the "godfather of value investing," Benjamin Graham.

It is based off of 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.

A Closer Look

Would you buy stocks based only on valuation? For those looking to analyze the fundamental risks before investing in these names, we drilled through the balance sheet of the undervalued companies to find at least one fundamental risk, namely, troubling sales trends.

We found 3 stocks that had declining top-line growth. These were companies with negative trends in revenue relative to accounts receivable, with slower growth in revenue year-over-year than growth in accounts receivable, as well as receivables comprising a larger portion of current assets.

Receivables represent the portion of revenue not yet collected, so the smaller the portion of revenue and current assets, the better.

For an ‪interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

Do you think its worth investing in these companies while keeping a close watch on the fundamental risk of troubling sales trends? See our list below as a starting point for your analysis.

We also looked at the 13F's for the 3 companies to find the top 2 institutional holders of these stocks.

1. Apache Corp. (NYSE:APA): Operates as an independent energy company.

  • Market cap at $32.7B, most recent closing price at $85.24.
  • Diluted TTM earnings per share at 6.28, and a MRQ book value per share value at 75.36, implies a Graham Number fair value of $103.19. Based on the stock's price at $85.36, this implies a potential upside of 20.89% from current levels.
  • Revenue grew by -3.44% during the most recent quarter ($4,179M vs. $4,328M y/y). Accounts receivable grew by 16.25% during the same time period ($2,976M vs. $2,560M y/y). Receivables, as a percentage of current assets, increased from 55.94% to 59.% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • The company is expected to report earnings on February 14th, 2013.
  • The top 2 holders of the stock are Capital Research Global Investors, and The Vanguard Group.

2. Newfield Exploration Co. (NYSE:NFX): Engages in the exploration, development, and acquisition of natural gas and crude oil properties.

  • Market cap at $3.96B, most recent closing price at $29.83.
  • Diluted TTM earnings per share at 2.11, and a MRQ book value per share value at 31.41, implies a Graham Number fair value of $38.62. Based on the stock's price at $29.55, this implies a potential upside of 30.68% from current levels.
  • Revenue grew by -2.07% during the most recent quarter ($615M vs. $628M y/y). Accounts receivable grew by 32.61% during the same time period ($427M vs. $322M y/y). Receivables, as a percentage of current assets, increased from 45.48% to 49.71% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • The company is expected to report earnings on February 20th, 2013.
  • The top 2 holders of the stock are Wellington Management, and T. Rowe Price.

3. Pepco Holdings, Inc. (NYSE:POM): Engages in the transmission, distribution, and supply of electricity.

  • Market cap at $4.44B, most recent closing price at $19.46.
  • Diluted TTM earnings per share at 1.15, and a MRQ book value per share value at 19.41, implies a Graham Number fair value of $22.41. Based on the stock's price at $19.45, this implies a potential upside of 15.22% from current levels.
  • Revenue grew by -10.44% during the most recent quarter ($1,476M vs. $1,648M y/y). Accounts receivable grew by -4.95% during the same time period ($940M vs. $989M y/y). Receivables, as a percentage of current assets, increased from 61.12% to 63.21% during the most recent quarter (comparing 3 months ending 2012-09-30 to 3 months ending 2011-09-30).
  • The company is expected to report earnings on February 25th, 2013.
  • The top 2 holders of the stock are The Vanguard Group, and State Street Corp.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

Source: 3 Undervalued Stocks Reporting Earnings In February With Troubling Sales Trends