The following is a list of tech stocks that are undervalued when comparing the current price to the fair value price, calculated by the Graham Number equation.
Benjamin Graham, the man who developed this equation, was a former mentor of Warren Buffett and is the so-called godfather of value investing.
The Graham Number, or the maximum price an investor should pay for a stock, is derived using only two data points: current earnings per share and current book value per share.
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. Therefore we only include companies that meet both of these criteria.
From these criteria, 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 could be undervalued? Full details below.
Graham input data sourced from Yahoo Finance, short float and performance data sourced from Finviz.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
List sorted by implied potential upside.
1. SK Telecom Co. Ltd. (SKM): Wireless Communications Industry. Market cap of $11.45B.
BVPS at $15.20, diluted EPS at $1.68. Graham number = sqrt(22.5 x $15.20 x $1.68) = $23.97. Current price at $17.68 (implies a potential upside of 35.58%).
Short float at 0.48%, which implies a short ratio of 1.79 days. The stock has gained 4.45% over the last year.
Judging by the company's cash holdings, shares look to offer good value at current levels. Price / Cashflow per Share, based on the most recent quarter's cash flow numbers, came in at 3.14, lower than the industry average of 6.91. It's also worth pointing out that the company's trailing twelve month Price / Cashflow per Share came in at 3.18, lower than the industry average of 8.69.
2. AT&T, Inc. (T): Telecom Services Industry. Market cap of $167.73B.
BVPS at $18.97, diluted EPS at $3.35. Graham number = sqrt(22.5 x $18.97 x $3.35) = $37.81. Current price at $28.32 (implies a potential upside of 33.52%).
Short float at 0.85%, which implies a short ratio of 1.92 days. The stock has gained 20.82% over the last year.
The company's capital spending accelerated by 29.49% over the last five years, much faster than the industry average of 11.12%. At least theoretically, this makes them more competitive over the coming years, since their operational assets are more up-to-date.
Insiders also appear to be optimistic on the outlook for the company. On a net basis, they've purchased an average of 8,099 shares per year (over last 2 years).
3. France Telecom (FTE): Telecom Services Industry. Market cap of $58.83B.
BVPS at $15.07, diluted EPS at $2.50. Graham number = sqrt(22.5 x $15.07 x $2.50) = $29.12. Current price at $21.94 (implies a potential upside of 32.70%).
Short float at 0.03%, which implies a short ratio of 0.84 days. The stock has gained 3.59% over the last year.
4. LG Display Co., Ltd. (LPL): Diversified Electronics Industry. Market cap of $11.44B.
BVPS at $13.69, diluted EPS at $1.44. Graham number = sqrt(22.5 x $13.69 x $1.44) = $21.06. Current price at $15.88 (implies a potential upside of 32.62%).
Short float at 0.76%, which implies a short ratio of 3.09 days. The stock has gained 4.38% over the last year.
5. Kyocera Corp. (KYO): Diversified Electronics Industry. Market cap of $19.98B.
BVPS at $91.37, diluted EPS at $7.70. Graham number = sqrt(22.5 x $91.37 x $7.70) = $125.82. Current price at $103.83 (implies a potential upside of 21.18%).
Short float at 0.02%, which implies a short ratio of 2.85 days. The stock has gained 16.36% over the last year.
The company has low debt and great liquidity, which significantly reduces its risk over the coming months. During the most recent quarter, the total Debt/Assets ratio stood at 1.97% vs. the industry average at 14.67%. The company also appears to be more liquid than its competitors. The TTM Current Ratio stands at 3.51, higher than the industry average at 2.83. (Note: All ratios based on the most recent quarter, annualized)
6. NTT DOCOMO, Inc. (DCM): Wireless Communications Industry. Market cap of $78.14B.
BVPS at $14.25, diluted EPS at $1.53. Graham number = sqrt(22.5 x $14.25 x $1.53) = $22.15. Current price at $19.04 (implies a potential upside of 16.33%).
Short float at 0.03%, which implies a short ratio of 3.01 days. The stock has gained 20.54% over the last year.
Institutional and mutual fund investors have been net purchasers of the company's shares over the last two quarters, suggesting that the smart money thinks there's more upside to the stock. Institutional investors have been net buyers of 378.3K shares during the most recent quarter, vs. 55.8K net shares purchased in the previous quarter. Mutual fund investors have also been optimistic on the stock. They were net buyers of 120.5K shares during the most recent quarter, vs. 110.6K net shares purchased in the previous quarter.
7. CenturyLink, Inc. (CTL): Telecom Services Industry. Market cap of $12.49B.
BVPS at $31.91, diluted EPS at $3.13. Graham number = sqrt(22.5 x $31.91 x $3.13) = $47.41. Current price at $40.89 (implies a potential upside of 15.93%).
Short float at 9.16%, which implies a short ratio of 6.38 days. The stock has gained 30.65% over the last year.
When compared to industry competitors, the company reported better than average profit margins during the most recent quarter. Gross margins came in at 65.92%, higher than the industry average at 49.97% (most recent quarter, annualized). Operating margin came in at 29.02%, higher than the industry average at 16.48%, while net profit margin came in at 29.02% vs. the industry average at 16.48%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
