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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 stocks reporting their Q3 earnings this week.

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.

(Click chart for more detail)

Do you think these companies are likely to beat earnings estimates? Use this list as a starting-off point for your own analysis.

List sorted by potential upside implied by Graham number.

1. Metals USA Holdings Corp. (NYSE:MUSA): Steel & Iron Industry. Market cap of $336.14M. Earnings to be reported on 10/21. TTM Diluted EPS at $1.15, MRQ Book Value Per Share at $6.10, Graham number at $12.56 (vs. current price at $8.99, implies a potential upside of 39.75%). The stock has performed poorly over the last month, losing 15.22%.

2. Community Trust Bancorp Inc. (NASDAQ:CTBI): Operates as the holding company for Community Trust Bank, Inc. Market cap of $383.19M. Earnings to be reported on 10/19. TTM Diluted EPS at $2.34, MRQ Book Value Per Share at $23.01, Graham number at $34.81 (vs. current price at $24.98, implies a potential upside of 39.34%). The stock is a short squeeze candidate, with a short float at 6.11% (equivalent to 17.22 days of average volume). The stock has lost 6.65% over the last year.

3. Sandy Spring Bancorp Inc. (NASDAQ:SASR): Operates as the holding company for Sandy Spring Bank, which offers a range of commercial banking, retail banking, and trust services to individuals and businesses in Maryland. Market cap of $363.91M. Earnings to be reported on 10/20. TTM Diluted EPS at $1.19, MRQ Book Value Per Share at $17.58, Graham number at $21.70 (vs. current price at $15.65, implies a potential upside of 38.63%). It's been a rough couple of days for the stock, losing 5.62% over the last week.

4. Cathay General Bancorp (NASDAQ:CATY): Operates as the holding company for Cathay Bank, which offers various commercial banking products and services for individuals, professionals, and small to medium-sized businesses primarily in California. Market cap of $963.34M. Earnings to be reported on 10/19. TTM Diluted EPS at $0.84, MRQ Book Value Per Share at $15.57, Graham number at $17.15 (vs. current price at $12.38, implies a potential upside of 38.57%). The stock is a short squeeze candidate, with a short float at 7.34% (equivalent to 8.15 days of average volume). The stock has lost 4.15% over the last year.

5. Hanmi Financial Corporation (NASDAQ:HAFC): Operates as the holding company for Hanmi Bank that provides general business banking products and services in the United States. Market cap of $158.82M. Earnings to be reported on 10/20. TTM Diluted EPS at $0.06, MRQ Book Value Per Share at $1.31, Graham number at $1.33 (vs. current price at $0.96, implies a potential upside of 38.53%). The stock is a short squeeze candidate, with a short float at 6.11% (equivalent to 11.52 days of average volume). The stock has had a couple of great days, gaining 9.37% over the last week.

6. Independent Bank Corp. (NASDAQ:INDB): Operates as the bank holding company for Rockland Trust Company that provides commercial and retail banking, and wealth management services in Massachusetts. Market cap of $518.69M. Earnings to be reported on 10/20. TTM Diluted EPS at $2.12, MRQ Book Value Per Share at $21.24, Graham number at $31.83 (vs. current price at $23.17, implies a potential upside of 37.38%). The stock is a short squeeze candidate, with a short float at 14.06% (equivalent to 30.74 days of average volume). The stock has gained 4.9% over the last year.

7. SunTrust Banks, Inc. (NYSE:STI): Operates as the holding company for SunTrust Bank, which provides various financial services to consumer and corporate customers in the United States. Market cap of $9.71B. Earnings to be reported on 10/21. TTM Diluted EPS at $0.81, MRQ Book Value Per Share at $36.40, Graham number at $25.76 (vs. current price at $18.90, implies a potential upside of 36.28%). The stock has lost 26.43% over the last year.

8. Washington Federal Inc. (WFSL): Operates as the holding company for Washington Federal, which provides various financial services in the United States. Market cap of $1.47B. Earnings to be reported on 10/20. TTM Diluted EPS at $0.86, MRQ Book Value Per Share at $16.84, Graham number at $18.05 (vs. current price at $13.40, implies a potential upside of 34.71%). The stock has performed poorly over the last month, losing 10.86%.

9. Spartan Stores Inc. (NASDAQ:SPTN): Operates as a grocery distributor and grocery retailer principally in Michigan and Indiana. Market cap of $372.78M. Earnings to be reported on 10/19. TTM Diluted EPS at $1.42, MRQ Book Value Per Share at $13.62, Graham number at $20.86 (vs. current price at $15.57, implies a potential upside of 33.98%). The stock is a short squeeze candidate, with a short float at 7.67% (equivalent to 11.66 days of average volume). The stock has gained 2.45% over the last year.

10. Ohio Valley Banc Corp. (NASDAQ:OVBC): Operates as the holding company for The Ohio Valley Bank Company that provides commercial and consumer banking products and services in central and southeastern Ohio and western West Virginia. Market cap of $68.40M. Earnings to be reported on 10/19. TTM Diluted EPS at $1.33, MRQ Book Value Per Share at $17.70, Graham number at $23.01 (vs. current price at $17.20, implies a potential upside of 33.81%). The stock has lost 4.09% over the last year.

11. AT&T, Inc. (NYSE:T): Provides telecommunication services to consumers, businesses, and other service providers worldwide. Market cap of $171.97B. Earnings to be reported on 10/20. TTM Diluted EPS at $3.44, MRQ Book Value Per Share at $19.21, Graham number at $38.56 (vs. current price at $28.94, implies a potential upside of 33.24%). The stock has gained 7.4% over the last year.

12. F.N.B. Corporation (NYSE:FNB): Provides various financial services to consumers and small to medium-sized businesses. Market cap of $1.13B. Earnings to be reported on 10/19. TTM Diluted EPS at $0.68, MRQ Book Value Per Share at $9.59, Graham number at $12.11 (vs. current price at $9.13, implies a potential upside of 32.67%). The stock is a short squeeze candidate, with a short float at 13.54% (equivalent to 15.04 days of average volume). The stock has gained 2.53% over the last year.

13. SVB Financial Group (NASDAQ:SIVB): Operates as the bank and financial holding company that provides commercial banking and financial products and services. Market cap of $1.70B. Earnings to be reported on 10/20. TTM Diluted EPS at $3.58, MRQ Book Value Per Share at $33.31, Graham number at $51.80 (vs. current price at $40.12, implies a potential upside of 29.11%). Might be undervalued at current levels, with a PEG ratio at 0.87, and P/FCF ratio at 7.98. The stock has lost 13.37% over the last year.

14. Alaska Air Group, Inc. (NYSE:ALK): Operates as an airline company serving destinations in the western United States, Canada, and Mexico. Market cap of $2.28B. Earnings to be reported on 10/20. TTM Diluted EPS at $7.88, MRQ Book Value Per Share at $33.46, Graham number at $77.02 (vs. current price at $59.73, implies a potential upside of 28.95%). The stock has had a couple of great days, gaining 5.33% over the last week.

15. City National Corp. (NYSE:CYN): Operates as the bank holding company for City National Bank that provides a range of banking, investing, and trust services to small to mid-sized businesses, entrepreneurs, professionals, and affluent individuals. Market cap of $2.07B. Earnings to be reported on 10/20. TTM Diluted EPS at $3.02, MRQ Book Value Per Share at $39.24, Graham number at $51.64 (vs. current price at $40.20, implies a potential upside of 28.45%). The stock has lost 25.52% over the last year.

16. Prosperity Bancshares Inc. (PRSP): Operates as the holding company for Prosperity Bank that provides retail and commercial banking services to small and medium-sized businesses and consumers. Market cap of $1.62B. Earnings to be reported on 10/21. TTM Diluted EPS at $2.86, MRQ Book Value Per Share at $32.24, Graham number at $45.55 (vs. current price at $35.64, implies a potential upside of 27.80%). The stock is a short squeeze candidate, with a short float at 14.61% (equivalent to 17.96 days of average volume). The stock has gained 6.94% over the last year.

17. East West Bancorp, Inc. (NASDAQ:EWBC): Operates as the holding company for East West Bank, which provides a range of personal and commercial banking services to small and medium-sized businesses, business executives, professionals, and other individuals in California. Market cap of $2.37B. Earnings to be reported on 10/19. TTM Diluted EPS at $1.24, MRQ Book Value Per Share at $14.63, Graham number at $20.20 (vs. current price at $15.93, implies a potential upside of 26.83%). The stock has lost 4.62% over the last year.

18. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX): Engages in the exploration, mining, and production of mineral resources. Market cap of $33.28B. Earnings to be reported on 10/19. TTM Diluted EPS at $5.87, MRQ Book Value Per Share at $15.30, Graham number at $44.95 (vs. current price at $35.65, implies a potential upside of 26.09%). Might be undervalued at current levels, with a PEG ratio at 0.74, and P/FCF ratio at 8.74. The stock has performed poorly over the last month, losing 14.99%.

19. SanDisk Corp. (NASDAQ:SNDK): Designs, develops, manufactures, and markets NAND-based flash data storage card products that are used in various consumer electronics products. Market cap of $11.0B. Earnings to be reported on 10/20. TTM Diluted EPS at $5.30, MRQ Book Value Per Share at $26.60, Graham number at $56.32 (vs. current price at $44.67, implies a potential upside of 26.08%). Might be undervalued at current levels, with a PEG ratio at 0.61, and P/FCF ratio at 8.63. The stock has gained 18.14% over the last year.

20. BancFirst Corporation (NASDAQ:BANF): Operates as the holding company for BancFirst that provides commercial banking services to retail customers and small to medium-sized businesses in the non-metropolitan trade centers of Oklahoma, and the metropolitan markets of Oklahoma City, Tulsa, Lawton, Muskogee, Norman, and Shawnee. Market cap of $543.56M. Earnings to be reported on 10/20. TTM Diluted EPS at $2.77, MRQ Book Value Per Share at $30.80, Graham number at $43.81 (vs. current price at $34.88, implies a potential upside of 25.61%). The stock is a short squeeze candidate, with a short float at 6.95% (equivalent to 19.15 days of average volume). The stock has lost 10.77% 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: 20 Companies Reporting Earnings Next Week Undervalued By Graham