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With earnings season starting next Monday, it might be worth updating your watchlists for undervalued companies.

We ran a Graham valuation analysis on all of the companies announcing earnings next week, and we found 4 that are significantly undervalued by this measure.



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 (TTM Earnings per Share) x (MRQ 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 are in a good position for next week? Use this list as a starting-off point for your own analysis into potentially undervalued opportunities.

List sorted by upside implied by the Graham equation.

1. JPMorgan Chase & Co. (NYSE:JPM): Money Center Banks Industry. Market cap of $189.77B. Earnings to be released on 4/13/11. BVPS at $43.06, diluted EPS at $3.96. Graham number = sqrt(22.5 x $43.06 x $3.96) = $61.94. Current price at $47.40 (implies a potential upside of 30.68%). The stock has gained 5.07% over the last year.



2. Simmons First National Corporation (NASDAQ:SFNC): Regional Bank. Market cap of $468.29M. Earnings to be released on 4/12/11. BVPS at $23.01, diluted EPS at $2.15. Graham number = sqrt(22.5 x $23.01 x $2.15) = $33.36. Current price at $26.96 (implies a potential upside of 23.75%). SFNC has a relatively low correlation to the market (beta = 0.36), which may be appealing to risk-averse investors. The stock has lost 1.09% over the last year.



3. Washington Federal Inc. (WFSL): Savings & Loans Industry. Market cap of $1.96B. Earnings to be released on 4/11/11. BVPS at $16.38, diluted EPS at $1.20. Graham number = sqrt(22.5 x $16.38 x $1.20) = $21.03. Current price at $17.31 (implies a potential upside of 21.49%). The stock has lost 13.39% over the last year.



4. Independent Bank Corp. (NASDAQ:INDB)
: Regional Bank. Market cap of $596.56M. Earnings to be released on 4/14/11. BVPS at $20.57, diluted EPS at $1.90. Graham number = sqrt(22.5 x $20.57 x $1.90) = $29.65. Current price at $27.74 (implies a potential upside of 6.90%). The stock has had a couple of great days, gaining 5.73% over the last week.



*Price multiples sourced from Yahoo! Finance, all other data sourced from Finviz.

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

Source: Earnings Season: 4 Undervalued Stocks to Watch Next Week