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Next week kicks off Q3 earnings season. For help on constructing a watchlist, one 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 those companies reporting Q3 earnings next week.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the 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.



Do you think these stocks should be trading higher? Use this list as a starting-off point for your own analysis.

List sorted by potential upside implied by Graham number.

1. Spartan Stores Inc. (NASDAQ:SPTN): Operates as a grocery distributor and grocery retailer principally in Michigan and Indiana. Market cap of $345.79M. Earnings to be released on 10/10. TTM Diluted EPS at $1.42, MRQ Book Value Per Share at $13.62, Graham number at $20.86 (vs. current price at $15.48, implies a potential upside of 34.76%). The stock is a short squeeze candidate, with a short float at 7.38% (equivalent to 10.71 days of average volume). The stock has gained 7.31% over the last year.

2. Ames National Corporation (NASDAQ:ATLO):
Provides commercial banking services primarily within the central Iowa counties of Boone, Marshall, Polk, and Story. Market cap of $143.78M. Earnings to be released on 10/14. TTM Diluted EPS at $1.41, MRQ Book Value Per Share at $13.84, Graham number at $20.95 (vs. current price at $15.63, implies a potential upside of 34.06%). The stock has lost 18.33% over the last year.

3. National Bankshares Inc. (NASDAQ:NKSH):
Operates as the holding company for the National Bank of Blacksburg (NYSE:NBB), a chartered national bank that provides a range of retail and commercial banking services to individuals, businesses, non-profits, and local governments in Virginia. Market cap of $161.08M. Earnings to be released on 10/13. TTM Diluted EPS at $2.31, MRQ Book Value Per Share at $19.65, Graham number at $31.96 (vs. current price at $24.13, implies a potential upside of 32.44%). The stock is a short squeeze candidate, with a short float at 6.24% (equivalent to 31.7 days of average volume). The stock has lost 5.3% over the last year.

4. Bank of the Ozarks, Inc. (NASDAQ:OZRK):
Operates as the bank holding company for Bank of the Ozarks that provides a range of retail and commercial banking services. Market cap of $707.13M. Earnings to be released on 10/10. TTM Diluted EPS at $2.97, MRQ Book Value Per Share at $11.27, Graham number at $27.44 (vs. current price at $20.93, implies a potential upside of 31.12%). The stock is a short squeeze candidate, with a short float at 16.92% (equivalent to 18.84 days of average volume). The stock has gained 12.23% over the last year.

5. Novellus Systems, Inc. (NASDAQ:NVLS):
Develops, manufactures, sells, and supports equipment used in the fabrication of integrated circuits. Market cap of $1.83B. Earnings to be released on 10/10. TTM Diluted EPS at $3.56, MRQ Book Value Per Share at $15.29, Graham number at $35.00 (vs. current price at $27.26, implies a potential upside of 28.38%). Might be undervalued at current levels, with a PEG ratio at 0.65, and P/FCF ratio at 5.6. The stock is currently stuck in a downtrend, trading 8.47% below its SMA20, 9.23% below its SMA50, and 22.37% below its SMA200. It's been a rough couple of days for the stock, losing 8.13% over the last week.

6. Safeway Inc. (NYSE:SWY):
Operates as a food and drug retailer in North America. Market cap of $5.71B. Earnings to be released on 10/13. TTM Diluted EPS at $1.44, MRQ Book Value Per Share at $13.32, Graham number at $20.77 (vs. current price at $16.63, implies a potential upside of 24.92%). The stock is currently stuck in a downtrend, trading 5.66% below its SMA20, 9.09% below its SMA50, and 23.44% below its SMA200. The stock has lost 20.04% 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: 6 Companies Reporting Earnings Next Week Undervalued By Graham