When looking at undervalued stocks, it is important to keep in mind the need for upward momentum to recover, and profit from, the difference between intrinsic value and current market price.

With that in mind, we screened for stocks exhibiting momentum to the upside by finding those hitting new 52-week highs. Among this list, we searched for those that were also undervalued by the Graham 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 (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.

We ultimately found 7 companies that met all of these criteria to be undervalued, and we listed them below along with other pertinent data.

Do you think these stocks are undervalued? Use this list as a starting-off point for your own analysis.

List sorted by potential upside implied by the Graham equation.* 1. ACE Limited (NYSE:ACE):* Property & Casualty Insurance Industry. Market cap of $22.41B. BVPS at $68.59, diluted EPS at $9.11. Graham number = sqrt(22.5 x $68.59 x $9.11) = $118.57. Current price at $66.80 (implies a potential upside of 77.50%). The stock has gained 30.08% over the last year.

*Property & Casualty Insurance Industry. Market cap of $2.04B. BVPS at $60.35, diluted EPS at $7.20. Graham number = sqrt(22.5 x $60.35 x $7.20) = $98.88. Current price at $66.46 (implies a potential upside of 48.78%). The stock might be undervalued at current levels, with a PEG ratio at 0.88, and P/FCF ratio at 14.65. The stock has gained 11.17% over the last year.*

**2. ProAssurance Corporation (NYSE:PRA):***REIT. Market cap of $14.42B. BVPS at $15.34, diluted EPS at $2.04. Graham number = sqrt(22.5 x $15.34 x $2.04) = $26.53. Current price at $17.94 (implies a potential upside of 47.91%). The stock has a relatively low correlation to the market (beta = 0.32), which may be appealing to risk-averse investors. The stock has gained 28.16% over the last year.*

3. Annaly Capital Management, Inc. (NYSE:NLY):3. Annaly Capital Management, Inc. (NYSE:NLY):

*: Wireless Communications Industry. Market cap of $12.61B. BVPS at $16.55, diluted EPS at $1.96. Graham number = sqrt(22.5 x $16.55 x $1.96) = $27.02. Current price at $19.47 (implies a potential upside of 38.76%). The stock offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 4.03%, current ratio at 1.43, and quick ratio at 1.41. The stock has gained 9% over the last year.*

4. SK Telecom Co. Ltd. (NYSE:SKM)4. SK Telecom Co. Ltd. (NYSE:SKM)

*Health Care Plans Industry. Market cap of $28.34B. BVPS at $65.04, diluted EPS at $7.36. Graham number = sqrt(22.5 x $65.04 x $7.36) = $103.78. Current price at $77.49 (implies a potential upside of 33.93%). The stock is exhibiting strong upside momentum--currently trading 7.77% above its SMA20, 11.56% above its SMA50, and 29.32% above its SMA200. The stock has gained 47.5% over the last year.*

**5. WellPoint Inc. (WLP):***Electric Utilities Industry. Market cap of $1.93B. BVPS at $31.01, diluted EPS at $2.95. Graham number = sqrt(22.5 x $31.01 x $2.95) = $45.37. Current price at $38.91 (implies a potential upside of 16.60%). The stock has a relatively low correlation to the market (beta = 0.45), which may be appealing to risk-averse investors. The stock has gained 13.67% over the last year.*

**6. IdaCorp, Inc. (NYSE:IDA):***: Regional Bank. Market cap of $624.88M. BVPS at $21.03, diluted EPS at $1.98. Graham number = sqrt(22.5 x $21.03 x $1.98) = $30.61. Current price at $29.27 (implies a potential upside of 4.57%). The stock is a short squeeze candidate, with a short float at 9.84% (equivalent to 38.04 days of average volume). The stock has gained 19.77% over the last year.*

7. Independent Bank Corp. (NASDAQ:INDB)7. Independent Bank Corp. (NASDAQ:INDB)

*BVPS and diluted EPS 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.