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 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).
We used the Graham Number to screen for potentially undervalued stocks among the universe of the 200 largest stocks by market cap that also pay dividends.
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.
Do you think the market is undervaluing these names? Use this list as a starting-off point for your own analysis.
List sorted by dividend yield.
1. General Electric Co. (NYSE:GE): Operates as a technology, service, and finance company worldwide. Market cap of $170.45B. Dividend yield at 3.73%, payout ratio at 42.54%. TTM Diluted EPS at $1.27, MRQ Book Value Per Share at $12.08, Graham number at $18.58 (vs. current price at $15.90, implies a potential upside of 16.85%). Might be undervalued at current levels, with a PEG ratio at 0.91, and P/FCF ratio at 10.82. The stock has gained 1.39% over the last year.
2. BlackRock, Inc. (NYSE:BLK): Provides its services to institutional, intermediary, and individual investors. Market cap of $28.51B. Dividend yield at 3.46%, payout ratio at 23.76%. TTM Diluted EPS at $12.27, MRQ Book Value Per Share at $136.38, Graham number at $194.04 (vs. current price at $151.14, implies a potential upside of 28.38%). The stock has gained 0.74% over the last year.
3. Chevron Corp. (NYSE:CVX): Engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. Market cap of $198.82B. Dividend yield at 3.14%, payout ratio at 25.66%. TTM Diluted EPS at $11.45, MRQ Book Value Per Share at $57.74, Graham number at $121.96 (vs. current price at $97.59, implies a potential upside of 24.98%). The stock has gained 29.62% over the last year.
4. Time Warner Inc. (NYSE:TWX): Operates as a media and entertainment company in the United States and internationally. Market cap of $32.27B. Dividend yield at 3.04%, payout ratio at 35.96%. TTM Diluted EPS at $2.32, MRQ Book Value Per Share at $30.15, Graham number at $39.67 (vs. current price at $29.98, implies a potential upside of 32.33%). The stock has gained 1.11% over the last year.
*EPS and BVPS 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.