Value investors seek to find stocks that they believe are trading below their fair value, with the assumption that they will soon rise to their fair value, generating a profit.
One way to look for potentially undervalued stocks is with an equation from the “godfather of value investing” and former mentor to Warren Buffett, Benjamin Graham.
He created the Graham equation, which calculates a stock’s maximum fair value based off of its EPS and book value per share (BVPS). Stocks trading below their Graham Number may be undervalued.
Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)
The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5.
We ran a screen on stocks recently exhibiting the “golden cross” technical sign, in which a stock’s 50-day moving average crosses above its 200-day MA, for those trading well below their Graham Numbers, possibly indicating that they are undervalued as well.
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.
Click to enlarge
Do you think these stocks will continue higher? Use this list as a starting point for your own analysis.
List sorted by potential upside implied by the Graham Number.
1. Kandi Technologies, Corp (NASDAQ:KNDI): Engages in the design, development, manufacture and commercialization of off-road vehicles, motorcycles, mini-cars and special automobile related products. Market cap of $79.88M. SMA50 at $2.68 vs. SMA200 at $2.56 (current price at $2.96). TTM Diluted EPS at $0.35, MRQ Book Value Per Share at $2.05, Graham number at $4.02 (vs. current price at $2.98, implies a potential upside of 34.83%). This is a risky stock that is significantly more volatile than the overall market (beta = 2.34). The stock has lost 44.04% over the last year.
2. La-Z-Boy Inc. (NYSE:LZB): Distributes and retails upholstery products and wood casegoods furniture products under the La-Z-Boy name in the United States and Canada. Market cap of $579.79M. SMA50 at $10.09 vs. SMA200 at $9.54 (current price at $11.64). TTM Diluted EPS at $1.38, MRQ Book Value Per Share at $8.01, Graham number at $15.77 (vs. current price at $11.73, implies a potential upside of 34.45%). This is a risky stock that is significantly more volatile than the overall market (beta = 2.54). The stock is a short squeeze candidate, with a short float at 8.66% (equivalent to 6.97 days of average volume). It has been a rough couple of days for the stock, losing 7.76% over the last week.
3. Teleflex Incorporated (NYSE:TFX): Develops, manufactures and supplies single-use medical devices used by hospitals and healthcare providers worldwide. Market cap of $2.38B. SMA50 at $58.16 vs. SMA200 at $57.72 (current price at $59.41). TTM Diluted EPS at $5.83, MRQ Book Value Per Share at $47.46, Graham number at $78.90 (vs. current price at $59.56, implies a potential upside of 32.48%). The stock has gained 8.57% 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.