If you consider yourself a value investor, you may be interested in this list. Value investors look for stocks that they believe are trading below their fair value, with the assumption that they’ll rise to their fair value in the near future.
One interesting proxy for fair value was developed by the “godfather of value investing” Benjamin Graham, called the Graham Number.
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.
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 point for your own analysis.
List sorted by potential upside implied by Graham.
1. Time Warner Inc. (NYSE:TWX): Operates as a media and entertainment company in the United States and internationally. Market cap of $33.34B. TTM Diluted EPS at $2.63, MRQ Book Value Per Share at $30.67, Graham number at $42.60 (vs. current price at $32.36, implies a potential upside of 31.65%). The stock has gained 13.72% over the last year.
2. BlackRock, Inc. (NYSE:BLK): Provides its services to institutional, intermediary, and individual investors. Market cap of $28.59B. TTM Diluted EPS at $12.67, MRQ Book Value Per Share at $138.25, Graham number at $198.52 (vs. current price at $151.27, implies a potential upside of 31.24%). The stock has gained 0.81% over the last year.
3. General Electric Company (NYSE:GE): Operates as a technology, service, and finance company worldwide. Market cap of $156.25B. TTM Diluted EPS at $1.31, MRQ Book Value Per Share at $11.79, Graham number at $18.64 (vs. current price at $14.70, implies a potential upside of 26.81%). It's been a rough couple of days for the stock, losing 5.43% over the last week.
4. The Dow Chemical Company (NYSE:DOW): Manufactures and supplies products used as raw materials in the production of customer products and services worldwide. Market cap of $30.31B. TTM Diluted EPS at $2.44, MRQ Book Value Per Share at $17.05, Graham number at $30.59 (vs. current price at $24.47, implies a potential upside of 25.03%). This is a risky stock that is significantly more volatile than the overall market (beta = 2.3). The stock has performed poorly over the last month, losing 11.86%.
5. Duke Energy Corporation (NYSE:DUK): Operates as an energy company in the Americas. Market cap of $26.61B. TTM Diluted EPS at $1.38, MRQ Book Value Per Share at $17.11, Graham number at $23.05 (vs. current price at $19.79, implies a potential upside of 16.47%). The stock has gained 20.35% 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.