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Benjamin Graham, the “godfather of value investing” and former mentor of Warren Buffett, developed an equation to calculate the fair value of a stock known as the “Graham Number.” When stocks are trading at significant discounts to this number, they are considered undervalued relative to it.

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 ran a screen on stocks from the healthcare sector for those trading at significant discounts to the Graham number.

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 these stocks are undervalued? Use this list as a starting point for your own analysis.

List sorted by potential upside implied by the Graham number.

1. Healthways Inc. (NASDAQ:HWAY): Specialized Health Services Industry. Market cap of $428.66M. TTM Diluted EPS at $1.04, MRQ Book Value Per Share at $13.00, Graham number at $17.44 (vs. current price at $12.72, implies a potential upside of 37.12%). The stock is a short squeeze candidate, with a short float at 6.52% (equivalent to 9.39 days of average volume). The stock has performed poorly over the last month, losing 11.17%.

2. Aetna Inc. (NYSE:AET): Healthcare Plans Industry. Market cap of $14.89B. TTM Diluted EPS at $4.59, MRQ Book Value Per Share at $27.95, Graham number at $53.73 (vs. current price at $39.95, implies a potential upside of 34.48%). Might be undervalued at current levels, with a PEG ratio at 0.73, and P/FCF ratio at 11.7. The stock has had a couple of great days, gaining 7.77% over the last week.

3. Teleflex Incorporated (NYSE:TFX): Medical Instruments and Supplies Industry. Market cap of $2.29B. TTM Diluted EPS at $5.31, MRQ Book Value Per Share at $47.85, Graham number at $75.61 (vs. current price at $56.40, implies a potential upside of 34.06%). The stock has had a couple of great days, gaining 8.84% over the last week.

4. Greatbatch, Inc. (NYSE:GB): Medical Appliances and Equipment Industry. Market cap of $515.71M. TTM Diluted EPS at $1.70, MRQ Book Value Per Share at $19.85, Graham number at $27.55 (vs. current price at $22.02, implies a potential upside of 25.13%). The stock is a short squeeze candidate, with a short float at 8.22% (equivalent to 12.37 days of average volume). The stock has gained 0.32% over the last year.

5. Molina Healthcare Inc. (NYSE:MOH):
Healthcare Plans Industry. Market cap of $884.08M. TTM Diluted EPS at $1.52, MRQ Book Value Per Share at $16.63, Graham number at $23.85 (vs. current price at $19.19, implies a potential upside of 24.28%). Might be undervalued at current levels, with a PEG ratio at 0.66, and P/FCF ratio at 4.68. The stock has had a couple of great days, gaining 6.26% over the last week. yet it has performed poorly over the last month, losing 13.52%.

6. Assisted Living Concepts Inc. (NYSE:ALC): Long-Term Care Facilities Industry. Market cap of $308.18M. TTM Diluted EPS at $0.92, MRQ Book Value Per Share at $12.88, Graham number at $16.33 (vs. current price at $13.44, implies a potential upside of 21.49%). The stock has performed poorly over the last month, losing 13.9%.

*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: 6 Healthcare Stocks Significantly Undervalued By Graham