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One method of searching for potentially undervalued stocks is using an equation created by none other than the “godfather of value investing,” Benjamin Graham.

Graham was a former mentor to Warren Buffett, whom he taught at Columbia Business School.

The equation calculates what is known as the “Graham number,” which is the maximum fair value for a stock. Any stock trading at a significant discount to this number is considered undervalued by the equation.

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 this equation to screen for potentially undervalued stocks among the universe of dividend stocks rallying above their 20-day, 50-day, and 200-day moving averages.

‪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.



Do you think these stocks will continue moving higher? Use this list as a starting-off point for your own analysis.

List sorted by potential upside implied by the Graham number.

1. Portland General Electric Company (NYSE:POR):
Operates as an integrated electric utility in Oregon. Market cap of $1.80B. Dividend yield at 4.43%, payout ratio at 47.27%. The stock is currently trading at 0.93% above its 20-Day SMA, $0.02 above its 50-Day SMA, and 1.50% above its 200-Day SMA. TTM Diluted EPS at $2.19, MRQ Book Value Per Share at $21.83, Graham number at $32.80 (vs. current price at $23.70, implies a potential upside of 38.39%). The stock has had a couple of great days, gaining 5.1% over the last week.

2. AmTrust Financial Services, Inc. (NASDAQ:AFSI):
Operates as a multinational specialty property and casualty insurance company in the United States and internationally. Market cap of $1.37B. Dividend yield at 1.57%, payout ratio at 11.0%. The stock is currently trading at 2.89% above its 20-Day SMA, $0.02 above its 50-Day SMA, and 12.05% above its 200-Day SMA. TTM Diluted EPS at $2.76, MRQ Book Value Per Share at $13.78, Graham number at $29.25 (vs. current price at $22.84, implies a potential upside of 28.08%). Might be undervalued at current levels, with a PEG ratio at 0.65, and P/FCF ratio at 10.03. The stock is a short squeeze candidate, with a short float at 12.38% (equivalent to 11.91 days of average volume). The stock has had a couple of great days, gaining 6.46% over the last week.

3. Sempra Energy (NYSE:SRE):
Engages in the development of energy infrastructure, operation of utilities, and provision of energy-related products and services worldwide. Market cap of $12.45B. Dividend yield at 3.69%, payout ratio at 35.42%. The stock is currently trading at 1.66% above its 20-Day SMA, $0.04 above its 50-Day SMA, and 0.55% above its 200-Day SMA. TTM Diluted EPS at $4.85, MRQ Book Value Per Share at $40.01, Graham number at $66.08 (vs. current price at $51.81, implies a potential upside of 27.54%). The stock has gained 0.72% over the last year.

4. Transatlantic Holdings Inc. (NYSE:TRH):
Offers reinsurance capacity for a range of property and casualty products. Market cap of $3.13B. Dividend yield at 1.76%, payout ratio at 31.95%. The stock is currently trading at 5.36% above its 20-Day SMA, 3.80% above its 50-Day SMA, and 3.85% above its 200-Day SMA. TTM Diluted EPS at $2.63, MRQ Book Value Per Share at $67.76, Graham number at $63.32 (vs. current price at $49.88, implies a potential upside of 26.95%). The stock has had a couple of great days, gaining 5.36% over the last week.

5. Group 1 Automotive Inc. (NYSE:GPI):
Engages in the marketing and sale of automotive products and services. Market cap of $921.96M. Dividend yield at 1.33%, payout ratio at 10.98%. The stock is currently trading at 8.77% above its 20-Day SMA, 4.26% above its 50-Day SMA, and 1.22% above its 200-Day SMA. TTM Diluted EPS at $3.01, MRQ Book Value Per Share at $36.60, Graham number at $49.79 (vs. current price at $39.28, implies a potential upside of 26.75%). Might be undervalued at current levels, with a PEG ratio at 0.72, and P/FCF ratio at 8.88. The stock is a short squeeze candidate, with a short float at 11.9% (equivalent to 7.09 days of average volume). The stock has had a couple of great days, gaining 14.94% over the last week.

6. Edison International (NYSE:EIX):
Engages in the supply of electric energy in central, coastal, and southern California. Market cap of $12.63B. Dividend yield at 3.30%, payout ratio at 39.39%. The stock is currently trading at 3.73% above its 20-Day SMA, 6.49% above its 50-Day SMA, and 4.09% above its 200-Day SMA. TTM Diluted EPS at $3.20, MRQ Book Value Per Share at $32.92, Graham number at $48.69 (vs. current price at $38.53, implies a potential upside of 26.36%). The stock has had a good month, gaining 10.52%.

7. National Interstate Corporation (NASDAQ:NATL):
Operates as a specialty property and casualty insurance company in the United States, the District of Columbia, and the Cayman Islands. Market cap of $441.68M. Dividend yield at 1.58%, payout ratio at 16.95%. The stock is currently trading at 2.90% above its 20-Day SMA, 2.55% above its 50-Day SMA, and 5.47% above its 200-Day SMA. TTM Diluted EPS at $2.00, MRQ Book Value Per Share at $17.06, Graham number at $27.71 (vs. current price at $21.95, implies a potential upside of 26.23%). The stock has gained 1.16% over the last year.

8. 1st Source Corporation (NASDAQ:SRCE):
Operates as the holding company for 1st Source Bank that offers commercial and consumer banking services to individuals and businesses in Indiana and Michigan. Market cap of $550.78M. Dividend yield at 2.81%, payout ratio at 37.35%. The stock is currently trading at 6.72% above its 20-Day SMA, 5.86% above its 50-Day SMA, and 12.62% above its 200-Day SMA. TTM Diluted EPS at $1.68, MRQ Book Value Per Share at $20.88, Graham number at $28.09 (vs. current price at $22.55, implies a potential upside of 24.58%). The stock has had a couple of great days, gaining 13.47% over the last week.

9. Standard Motor Products Inc. (NYSE:SMP):
Distributes replacement parts for motor vehicles in the automotive aftermarket industry primarily in the United States, Canada, and Latin America. Market cap of $338.54M. Dividend yield at 1.89%, payout ratio at 15.80%. The stock is currently trading at 11.54% above its 20-Day SMA, 18.97% above its 50-Day SMA, and 13.41% above its 200-Day SMA. TTM Diluted EPS at $1.40, MRQ Book Value Per Share at $10.36, Graham number at $18.06 (vs. current price at $14.63, implies a potential upside of 23.48%). This is a risky stock that is significantly more volatile than the overall market (beta = 2.31). The stock has had a couple of great days, gaining 22.23% over the last week.

10. Miller Industries Inc. (NYSE:MLR):
Engages in the manufacture and sale of vehicle towing and recovery equipment in North America and internationally. Market cap of $218.49M. Dividend yield at 2.62%, payout ratio at 14.43%. The stock is currently trading at 1.64% above its 20-Day SMA, 2.28% above its 50-Day SMA, and 11.10% above its 200-Day SMA. TTM Diluted EPS at $1.61, MRQ Book Value Per Share at $13.73, Graham number at $22.30 (vs. current price at $18.13, implies a potential upside of 23.01%). The stock has had a couple of great days, gaining 10.62% over the last week.

11. Community Bank System Inc. (NYSE:CBU):
Operates as the holding company for Community Bank, N. Market cap of $887.86M. Dividend yield at 4.31%, payout ratio at 49.12%. The stock is currently trading at 5.24% above its 20-Day SMA, 4.61% above its 50-Day SMA, and 1.09% above its 200-Day SMA. TTM Diluted EPS at $1.95, MRQ Book Value Per Share at $19.83, Graham number at $29.50 (vs. current price at $23.99, implies a potential upside of 22.95%). The stock is a short squeeze candidate, with a short float at 13.12% (equivalent to 16.03 days of average volume). The stock has had a couple of great days, gaining 9.44% over the last week.

12. German American Bancorp Inc. (NASDAQ:GABC):
Operates as the holding company for German American Bancorp that offers retail and commercial banking, mortgage banking, and financial planning services primarily in southern Indiana. Market cap of $212.39M. Dividend yield at 3.32%, payout ratio at 40.82%. The stock is currently trading at 5.50% above its 20-Day SMA, 6.47% above its 50-Day SMA, and 2.50% above its 200-Day SMA. TTM Diluted EPS at $1.38, MRQ Book Value Per Share at $12.71, Graham number at $19.87 (vs. current price at $16.33, implies a potential upside of 21.65%). The stock has had a couple of great days, gaining 9.4% over the last week.

13. Lithia Motors Inc. (NYSE:LAD):
Operates as an automotive franchisee and retailer of new and used vehicles. Market cap of $459.06M. Dividend yield at 1.62%, payout ratio at 20.76%. The stock is currently trading at 12.14% above its 20-Day SMA, 5.78% above its 50-Day SMA, and 8.58% above its 200-Day SMA. TTM Diluted EPS at $1.41, MRQ Book Value Per Share at $12.99, Graham number at $20.30 (vs. current price at $17.29, implies a potential upside of 17.41%). The stock is a short squeeze candidate, with a short float at 9.53% (equivalent to 5.03 days of average volume). The stock has had a couple of great days, gaining 24.44% over the last week.

14. Rent-A-Center Inc. (NASDAQ:RCII):
Engages in leasing household durable goods to customers on a rent-to-own basis. Market cap of $1.85B. Dividend yield at 2.13%, payout ratio at 9.68%. The stock is currently trading at 9.29% above its 20-Day SMA, 15.78% above its 50-Day SMA, and 1.43% above its 200-Day SMA. TTM Diluted EPS at $2.42, MRQ Book Value Per Share at $22.26, Graham number at $34.81 (vs. current price at $29.98, implies a potential upside of 16.13%). The stock is a short squeeze candidate, with a short float at 11.23% (equivalent to 9.08 days of average volume). The stock has had a couple of great days, gaining 16.19% over the last week.

15. West Bancorp, Inc. (NASDAQ:WTBA):
Operates as a bank holding company for West Bank that provides community banking and trust services primarily in the Des Moines and Iowa City, and Iowa metropolitan areas. Market cap of $160.95M. Dividend yield at 2.16%, payout ratio at 14.07%. The stock is currently trading at 14.47% above its 20-Day SMA, 12.82% above its 50-Day SMA, and 22.24% above its 200-Day SMA. TTM Diluted EPS at $0.71, MRQ Book Value Per Share at $6.85, Graham number at $10.46 (vs. current price at $9.02, implies a potential upside of 15.97%). The stock has had a couple of great days, gaining 13.92% over the last week.

16. Bank of Marin Bancorp (NASDAQ:BMRC):
Operates as the bank holding company for Bank of Marin that offers a range of commercial and retail banking products and services in California. Market cap of $188.47M. Dividend yield at 1.81%, payout ratio at 21.89%. The stock is currently trading at 6.79% above its 20-Day SMA, 1.72% above its 50-Day SMA, and 1.25% above its 200-Day SMA. TTM Diluted EPS at $2.84, MRQ Book Value Per Share at $24.35, Graham number at $39.45 (vs. current price at $34.15, implies a potential upside of 15.51%). The stock has had a couple of great days, gaining 9.92% over the last week.

*BVPS and EPS data sourced from Yaho! Finance, all other data sourced from Finviz. Data sourced October 12th.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 16 Rallying Dividend Stocks Undervalued By Graham