Value investors search for opportunities to buy stocks that are trading below their fair values. These stocks may rise to their fair value in the near future, generating a profit for those shrewd enough to find them.
One tool for finding these undervalued names is the Graham equation, developed by the “godfather of value investing” Benjamin Graham.
The Graham Number is a measure of a stock’s maximum fair value, and it 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.
Stocks trading at a significant discount to their Graham number may be undervalued.
We ran a screen on the wireless communications industry for stocks trading at the most significant discounts to their Graham number.
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.
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. MetroPCS Communications, Inc. (PCS): A wireless telecommunications carrier, together with its subsidiaries, provides wireless broadband mobile services in the United States. Market cap of $3.11B. TTM Diluted EPS at $0.61, MRQ Book Value Per Share at $7.81, Graham number at $10.35 (vs. current price at $8.48, implies a potential upside of 22.09%). The stock has lost 26% over the last year.
2. Neutral Tandem, Inc. (NASDAQ:TNDM): Provides voice, Internet protocol (IP) transit, and Ethernet telecommunications services worldwide. Market cap of $313.87M. TTM Diluted EPS at $0.81, MRQ Book Value Per Share at $8.13, Graham number at $12.17 (vs. current price at $10.18, implies a potential upside of 19.57%). Might be undervalued at current levels, with a PEG ratio at 0.64, and P/FCF ratio at 9.32. It's been a rough couple of days for the stock, losing 8.69% over the last week.
3. NII Holdings Inc. (NASDAQ:NIHD): Provides wireless communication services to businesses and individuals primarily in Mexico, Brazil, Argentina, Peru, and Chile. Market cap of $4.02B. TTM Diluted EPS at $1.77, MRQ Book Value Per Share at $18.83, Graham number at $27.38 (vs. current price at $23.43, implies a potential upside of 16.88%). The stock is currently stuck in a downtrend, trading 10.59% below its SMA20, 19.56% below its SMA50, and 37.87% below its SMA200. The stock has performed poorly over the last month, losing 17.95%.
*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.