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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.

We used the Graham Number to screen for potentially undervalued stocks among the universe of high cash-flow growth stocks, comparing trailing-twelve-month (TTM) free operating cash flow/revenue to the company’s five-year average.

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.




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 these stocks are being underpriced by the market? Use this list as a starting point for your own analysis.

List sorted by potential upside implied by Graham.

1. Etablissements Delhaize Freres et Cie Le Lion S.A. (NYSE:DEG): Grocery Stores Industry. Market cap of $6.35B. TTM free operating cash flow/revenue at 0.03 vs. five-year average at 0.01. TTM diluted EPS at $8.05, MRQ book value per share at $70.39, Graham number at $112.91 (vs. current price at $65.68, implies a potential upside of 71.91%). It has been a rough couple of days for the stock, losing 11.07% over the last week.

2. STEC, Inc. (NASDAQ:STEC): Data Storage Devices Industry. Market cap of $453.14M. TTM free operating cash flow/revenue at 0.16 vs. five-year average at 0.02. TTM diluted EPS at $1.05, MRQ book value per share at $6.90, Graham number at $12.77 (vs. current price at $9.65, implies a potential upside of 32.31%). It has been a rough couple of days for the stock, losing 12.29% over the last week.

3. CVS Caremark Corporation (NYSE:CVS): Drug Stores Industry. Market cap of $43.45B. TTM free operating cash flow/revenue at 0.04 vs. five-year average at 0.01. TTM diluted EPS at $2.46, MRQ book value per share at $28.41, Graham number at $39.65 (vs. current price at $33.23, implies a potential upside of 19.33%). It has been a rough couple of days for the stock, losing 11.91% over the last week.

4. Mercury Computer Systems, Inc. (NASDAQ:MRCY):
Computer Peripherals Industry. Market cap of $457.23M. TTM free operating cash flow/revenue at 0.07 vs. five-year average at 0.01. TTM diluted EPS at $1.34, MRQ book value per share at $10.60, Graham number at $17.88 (vs. current price at $15.78, implies a potential upside of 13.29%). It has been a rough couple of days for the stock, losing 8.46% over the last week.

5. Cullen/Frost Bankers, Inc. (NYSE:CFR):
Regional Banks Industry. Market cap of $2.90B. TTM free operating cash flow/revenue at 0.35 vs. five-year average at 0.10. TTM diluted EPS at $3.53, MRQ book value per share at $35.54, Graham number at $53.13 (vs. current price at $49.99, implies a potential upside of 6.28%). The stock is a short squeeze candidate, with a short float at 6.27% (equivalent to 9.15 days of average volume). It has been a rough couple of days for the stock, losing 12.48% over the last week.

*BVPS and EPS data sourced from Yahoo! Finance, free operating cash flow/revenue data sourced from Screener.co, 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: 5 High Cash-Flow Growth Stocks Undervalued by Graham