In the search for potentially undervalued stocks, one method comes from the “godfather of value investing,” Benjamin Graham. Graham was an author, professor and former mentor of 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.
Using this equation, we screened for potentially undervalued stocks among the universe of stocks trading under $3.
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.
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Do you think these stocks should be trading higher? Use this list as a starting point for your own analysis.
List sorted by potential upside implied by Graham number.
1. Theragenics Corp. (TGX): Operates as a medical device company serving the cancer treatment and surgical products markets primarily in the United States and Europe. Market cap of $50.96M. Price at $1.51. TTM Diluted EPS at $0.08, MRQ Book Value Per Share at $2.46, Graham number at $2.10 (vs. current price at $1.54, implies a potential upside of 36.64%). The stock has recently rebounded, and is currently trading 14.87% above its SMA20 and 5.68% above its SMA50. However, the stock still trades 12.22% below its SMA200. The stock has had a couple of great days, gaining 15.38% over the last week.
2. Century Casinos Inc. (CNTY): Operates as an international casino entertainment company in the United States and internationally. Market cap of $54.92M. Price at $2.21. TTM Diluted EPS at $0.09, MRQ Book Value Per Share at $4.78, Graham number at $3.11 (vs. current price at $2.33, implies a potential upside of 33.53%). The stock is currently stuck in a downtrend, trading 10.07% below its SMA20, 15.98% below its SMA50, and 19.87% below its SMA200. It has been a rough couple of days for the stock, losing 10.51% over the last week.
3. SeraCare Life Sciences, Inc. (SRLS): Provides products and services to facilitate the discovery, development and production of human and animal diagnostics and therapeutics. Market cap of $56.17M. Price at $2.91. TTM Diluted EPS at $0.29, MRQ Book Value Per Share at $2.05, Graham number at $3.66 (vs. current price at $2.90, implies a potential upside of 26.12%). The stock is a short squeeze candidate, with a short float at 7.09% (equivalent to 23.23 days of average volume). The stock has lost 27.5% 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.