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Value investors search for stocks that appear underpriced relative to their intrinsic value, which is based off of company metrics such as earnings or book value. One helpful way to find potentially undervalued opportunities 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.

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 used the Graham Number to screen for potentially undervalued stocks among the universe of small-cap stocks (with market caps less than $300 million) that appear undervalued to earnings growth (with PEG less than 1).

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.



List sorted by potential upside implied by the Graham number.

1. Multimedia Games Inc. (NASDAQ:MGAM): Gaming Activities Industry. Market cap of $118.90M. PEG at 0.34. TTM diluted EPS at $0.43, MRQ book value per share at $4.13, implies a Graham number of $6.32 (vs. current price at $4.55, implies a potential upside of 38.93%). The stock is currently stuck in a downtrend, trading 5.68% below its SMA20, 6.57% below its SMA50, and 11.17% below its SMA200. It's been a rough couple of days for the stock, losing 10.34% over the last week.

2. Orion Marine Group, Inc (NYSE:ORN): Heavy Construction Industry. Market cap of $230.94M. PEG at 0.77. TTM diluted EPS at $0.69, MRQ book value per share at $9.22, implies a Graham number of $11.96 (vs. current price at $8.68, implies a potential upside of 37.84%). The stock is a short squeeze candidate, with a short float at 9.81% (equivalent to 10.07 days of average volume). It's been a rough couple of days for the stock, losing 5.52% over the last week.

3. Big 5 Sporting Goods Corp. (NASDAQ:BGFV):
Sporting Goods Stores Industry. Market cap of $184.85M. PEG at 0.82. TTM diluted EPS at $0.84, MRQ book value per share at $7.03, implies a Graham number of $11.53 (vs. current price at $8.46, implies a potential upside of 36.25%). The stock has lost 37.75% over the last year.

4. Center Financial Corporation (NASDAQ:CLFC): Savings & Loans Industry. Market cap of $249.44M. PEG at 0.95. TTM diluted EPS at $0.55, MRQ book value per share at $5.66, implies a Graham number of $8.37 (vs. current price at $6.20, implies a potential upside of 34.99%). The stock has gained 22.55% over the last year.

5. Cray Inc. (NASDAQ:CRAY): Diversified Computer Systems Industry. Market cap of $214.55M. PEG at 0.50. TTM diluted EPS at $0.71, MRQ book value per share at $4.16, implies a Graham number of $8.15 (vs. current price at $6.05, implies a potential upside of 34.74%). It's been a rough couple of days for the stock, losing 6.02% over the last week.

6. Pericom Semiconductor Corp. (NASDAQ:PSEM): Semiconductor Industry. Market cap of $217.26M. PEG at 0.62. TTM diluted EPS at $0.62, MRQ book value per share at $9.65, implies a Graham number of $11.60 (vs. current price at $8.67, implies a potential upside of 33.82%). It's been a rough couple of days for the stock, losing 5.86% over the last week.

7. Delta Apparel Inc. (NYSEMKT:DLA): Textile Industry. Market cap of $157.62M. PEG at 0.38. TTM diluted EPS at $1.63, MRQ book value per share at $15.85, implies a Graham number of $24.11 (vs. current price at $18.92, implies a potential upside of 27.43%). The stock has gained 23.08% over the last year.

BVPS and EPS data 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: 7 Small-Cap Stocks Undervalued by Earnings Growth and Graham Number