If you’re looking for ideas on how to search for potentially undervalued stocks, one method comes from the “godfather of value investing” himself, Benjamin Graham. Graham was an author, professor, and former mentor to Warren Buffett.
Graham created an equation that calculates the fair value of stocks based on two fundamental 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.
Stocks trading at significant discounts to this number appear undervalued.
We ran a screen on stocks in the clean energy industry for those trading at significant discounts to their Graham numbers, appearing undervalued.
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.
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. First Solar, Inc. (NASDAQ:FSLR): Manufactures and sells solar modules using a thin-film semiconductor technology. Market cap of $4.64B. TTM Diluted EPS at $5.87, MRQ Book Value Per Share at $42.66, Graham number at $75.06 (vs. current price at $53.77, implies a potential upside of 39.60%). The stock is a short squeeze candidate, with a short float at 34.58% (equivalent to 7.21 days of average volume). The stock has performed poorly over the last month, losing 19.57%.
2. Sims Metal Management Limited (SMS): Operates in the metal recycling industry. Market cap of $2.88B. TTM Diluted EPS at $0.97, MRQ Book Value Per Share at $14.75, Graham number at $17.94 (vs. current price at $13.99, implies a potential upside of 28.25%). The stock has recently rebounded, and is currently trading 13.61% above its SMA20 and 5.57% above its SMA50. However, the stock still trades 13.34% below its SMA200. The stock has had a good month, gaining 21.44%.
3. Applied Materials Inc. (NASDAQ:AMAT): Provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic (PV), and related industries worldwide. Market cap of $15.40B. TTM Diluted EPS at $1.45, MRQ Book Value Per Share at $6.49, Graham number at $14.55 (vs. current price at $11.69, implies a potential upside of 24.48%). Might be undervalued at current levels, with a PEG ratio at 0.87, and P/FCF ratio at 9.07. The stock has recently rebounded, and is currently trading 9.11% above its SMA20 and 8.18% above its SMA50. However, the stock still trades 10.84% below its SMA200. The stock has had a good month, gaining 12.84%.
4. IXYS Corp. (NASDAQ:IXYS): Engages in the development, manufacture, and marketing of power semiconductors, advanced mixed signal integrated circuits (ICs), application specific integrated circuits (ASICs), and systems and radio frequency semiconductors. Market cap of $372.92M. TTM Diluted EPS at $1.23, MRQ Book Value Per Share at $7.66, Graham number at $14.56 (vs. current price at $11.82, implies a potential upside of 23.18%). The stock is a short squeeze candidate, with a short float at 5.34% (equivalent to 9.35 days of average volume). It's been a rough couple of days for the stock, losing 10.45% over the last week.
*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.