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One helpful way to find potentially undervalued firms is from the “godfather of value investing” himself, Benjamin Graham.

Graham created an equation to calculate the maximum fair value for a stock, referred to as the Graham Number. Any stock trading at a significant discount to this number would appear undervalued.

The Graham Number only requires two data points: current earnings per share and current book value per share. 
The Graham Number = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share). 

This equation assumes that a stock is overvalued if P/E is over 15 or P/BV is over 1.5.

We used the Graham equation to screen for potentially undervalued stocks among those rallying above their 20-day, 50-day, and 200-day moving averages. From this universe, we then searched for those seeing significant net insider buying over the last six months.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.


We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

[Click to enlarge]

Do you think the market is undervaluing these companies? Use this list as a starting-off point for your own analysis.

1. Starwood Property Trust, Inc. (NYSE:STWD): REIT Industry. Market cap of $992.15M. TTM diluted EPS at $1.47, MRQ Book Value Per Share at $18.69, implies a Graham number of $24.86 (vs. current price at $20.80, a potential upside of 19.53%. The stock is trading at 2.39% above its 20-Day SMA, 0.20% above its 50-Day SMA, and 0.90% above its 200-Day SMA. Net insider purchases over the last six months at 41.59K, representing 0.06% of the company's 69.33M share float. The stock has gained 24.62% over the last year.

2. PH Glatfelter Co. (NYSE:GLT): Paper & Paper Products Industry. Market cap of $721.45M. TTM diluted EPS at $1.56, MRQ Book Value Per Share at $12.69, implies a Graham number of $21.10 (vs. current price at $15.98, a potential upside of 32.07%. The stock is trading at 5.11% above its 20-Day SMA, 8.16% above its 50-Day SMA, and 23.77% above its 200-Day SMA. Net insider purchases over the last six months at 31.00K, representing 0.07% of the company's 45.55M share float. The stock is a short squeeze candidate, with a short float at 7.55% (equivalent to 10.9 days of average volume). The stock has gained 41.3% over the last year.

*BVPS, EPS, and insider data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: 2 Rallying Stocks Undervalued by Graham and Being Bought by Insiders