# 6 Breakout Stocks Undervalued Relative to the Graham Number

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|  Includes: AEIS, KCG, LLL, NSIT, PMC, WHR
by: Kapitall

The following is a list of breakout stocks, based on moving average trends. For this article, we tracked down stocks that have recently seen the 50-day simple moving average (SMA50) move above the 200-day moving average (SMA200)--a bullish technical signal called the "Golden Cross."

These stocks are also undervalued when comparing current price to the fair value price, calculated by the Graham Number equation.

The Graham Number is named after a formula developed by legendary value investor Benjamin Graham. It is the maximum price an investor should pay for a stock, and it is derived using only two data points: current earnings per share and current book value per share.

Here's the formula:

The Graham Number = Fair Value of a Stock = Square Root of (22.5) x (Earnings per Share) x (Book Value per Share).

The math of the Graham number is relatively straightforward. It is predicated on the belief that the price-to-earnings (P/EPS) ratio should be no more than 15, and the price-to-book value (P/BVPS) ratio should be no more than 1.5.

From that, the product of the two should not be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5, from which the equation was created.

Do you think these companies are undervalued? Are these names positioned to move upward? You be the judge.

Graham input data from Yahoo Finance, short float and performance data from Finviz, recent developments from Reuters.

List sorted by potential upside from current price, according to Graham fair value.

click for expanded image

1. L-3 Communications Holdings Inc. (NYSE:LLL):

Aerospace/Defense Products & Services Industry. Market cap of \$9.35B.

Moving Averages: SMA50 at \$75.38 vs. SMA200 at \$73.97 (current price at \$79.19).

Graham Data: BVPS at \$60.39, diluted EPS at \$8.25. Graham number = sqrt(22.5 x \$60.39 x \$8.25) = \$105.88. Current price at \$79.19 (implies a potential upside of 33.70%).

Other Sentiment Data: Short float at 3.21%, which implies a short ratio of 3.66 days. The stock has lost -9.65% over the last year.

Recent developments: Reaffirmed FY11 revenue guidance in line with analyst estimates (February 2011). Raised FY11 earnings guidance above analyst estimates (January 2011).

2. PharMerica Corporation (NYSE:PMC):

Drug Stores Industry. Market cap of \$366.38M.

Moving Averages: SMA50 at \$11.96 vs. SMA200 at \$11.88 (current price at \$12.02).

Graham Data: BVPS at \$12.90, diluted EPS at \$0.82. Graham number = sqrt(22.5 x \$12.90 x \$0.82) = \$15.43. Current price at \$12.02 (implies a potential upside of 28.35%).

Other Sentiment Data: Short float at 7.79%, which implies a short ratio of 8.57 days. The stock has lost -29.22% over the last year.

Recent developments: Announced acquiring nearly all assets of Lone Star Pharmacy (January 2011). Announced naming Thomas P. Mac Mahon as non-executive Chairman of the Board (December 2010).

3. Knight Capital Group Inc. (NYSE:KCG):

Investment Brokerage Industry. Market cap of \$1.43B.

Moving Averages: SMA50 at \$13.86 vs. SMA200 at \$13.71 (current price at \$14.27).

Graham Data: BVPS at \$14.91, diluted EPS at \$0.97. Graham number = sqrt(22.5 x \$14.91 x \$0.97) = \$18.04. Current price at \$14.27 (implies a potential upside of 26.41%).

Other Sentiment Data: Short float at 9.29%, which implies a short ratio of 7.78 days. The stock has lost -10.94% over the last year.

Recent developments: Announced completing acquisition of Designated Market Maker and Lead Market Maker of Kellogg Capital Markets, LLC (December 2010). Announced consolidating the company’s two US broker-dealer subsidiaries into two entities (December 2010).

4. Whirlpool Corp. (NYSE:WHR):

Appliances Industry. Market cap of \$6.34B.

Moving Averages: SMA50 at \$87.50 vs. SMA200 at \$85.50 (current price at \$81.37).

Graham Data: BVPS at \$55.58, diluted EPS at \$7.97. Graham number = sqrt(22.5 x \$55.58 x \$7.97) = \$99.83. Current price at \$81.37 (implies a potential upside of 22.69%).

Other Sentiment Data: Short float at 8.94%, which implies a short ratio of 4.2 days. The stock has gained 0.81% over the last year.

Recent developments: Announced FY11 earnings guidance above analyst estimates, in part due to U.S. energy tax credits to be earned in 2011 (February 2011).

5. Insight Enterprises Inc. (NASDAQ:NSIT):

Application Software Industry. Market cap of \$847.67M.

Moving Averages: SMA50 at \$14.55 vs. SMA200 at \$14.51 (current price at \$17.65).

Graham Data: BVPS at \$11.77, diluted EPS at \$1.61. Graham number = sqrt(22.5 x \$11.77 x \$1.61) = \$20.65. Current price at \$17.65 (implies a potential upside of 16.99%).

Other Sentiment Data: Short float at 2.38%, which implies a short ratio of 4.83 days. The stock has gained 39.32% over the last year.

Recent developments: Announced FY11 earnings guidance above analyst estimates (February 2011).

6. Advanced Energy Industries, Inc. (NASDAQ:AEIS):

Diversified Electronics Industry. Market cap of \$672.76M.

Moving Averages: SMA50 at \$14.39 vs. SMA200 at \$13.91 (current price at \$15.59).

Graham Data: BVPS at \$8.63, diluted EPS at \$1.64. Graham number = sqrt(22.5 x \$8.63 x \$1.64) = \$17.85. Current price at \$15.59 (implies a potential upside of 14.46%).

Other Sentiment Data: Short float at 4.44%, which implies a short ratio of 2.98 days. The stock has gained 0.39% over the last year.

Recent developments: Announced Q1 2011 guidance in line with analyst estimates (February 2011).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.