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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 of the healthcare sector for those trading well below their Graham Numbers, possibly indicating that they are undervalued.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six 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 Number.

1. China Medical Technologies Inc. (CMED): Develops, manufactures, and markets immunodiagnostic and molecular diagnostic products. Market cap of $90.68M. TTM Diluted EPS at $0.71, MRQ Book Value Per Share at $11.14, Graham number at $13.34 (vs. current price at $2.98, implies a potential upside of 347.66%). The stock is a short squeeze candidate, with a short float at 17.39% (equivalent to 9.91 days of average volume). It's been a rough couple of days for the stock, losing 14.59% over the last week.

2. Community Health Systems, Inc. (NYSE:CYH): Provides healthcare services through the operation of hospitals in the United States. Market cap of $1.53B. TTM Diluted EPS at $2.63, MRQ Book Value Per Share at $26.52, Graham number at $39.61 (vs. current price at $16.58, implies a potential upside of 138.93%). It's been a rough couple of days for the stock, losing 11.76% over the last week.

3. PerkinElmer Inc. (NYSE:PKI): Provides technology, services, and solutions to the diagnostics, research, environmental and safety, and industrial and laboratory services markets worldwide. Market cap of $2.04B. TTM Diluted EPS at $3.27, MRQ Book Value Per Share at $17.20, Graham number at $35.57 (vs. current price at $18.66, implies a potential upside of 90.64%). It's been a rough couple of days for the stock, losing 6.58% over the last week.

4. Nutraceutical International Corp. (NASDAQ:NUTR): Engages in the manufacture, marketing, distribution, and retail of branded nutritional supplements and other natural products in the United States and internationally. Market cap of $112.89M. TTM Diluted EPS at $1.53, MRQ Book Value Per Share at $11.70, Graham number at $20.07 (vs. current price at $11.00, implies a potential upside of 82.45%). The stock has performed poorly over the last month, losing 14.39%.

5. Coventry Health Care Inc. (CVH): Operates as a managed healthcare company in the United States. Market cap of $4.47B. TTM Diluted EPS at $4.10, MRQ Book Value Per Share at $31.27, Graham number at $53.71 (vs. current price at $31.01, implies a potential upside of 73.20%). The stock has gained 17.22% over the last year.

6. WellPoint Inc. (WLP): Operates as a health benefits company in the United States. Market cap of $22.10B. TTM Diluted EPS at $7.61, MRQ Book Value Per Share at $67.92, Graham number at $107.84 (vs. current price at $64.60, implies a potential upside of 66.94%). Might be undervalued at current levels, with a PEG ratio at 0.84, and P/FCF ratio at 6.95. It's been a rough couple of days for the stock, losing 7.28% over the last week.

7. Lifepoint Hospitals Inc. (NASDAQ:LPNT): Operates general acute care hospitals in non-urban communities in the United States. Market cap of $1.67B. TTM Diluted EPS at $3.13, MRQ Book Value Per Share at $39.38, Graham number at $52.66 (vs. current price at $34.97, implies a potential upside of 50.59%). The stock is a short squeeze candidate, with a short float at 10.01% (equivalent to 9.65 days of average volume). It's been a rough couple of days for the stock, losing 10.64% over the last week.

8. Cigna Corp. (NYSE:CI): Operates as a health service organization. Market cap of $12.15B. TTM Diluted EPS at $5.50, MRQ Book Value Per Share at $28.71, Graham number at $59.61 (vs. current price at $42.79, implies a potential upside of 39.30%). Might be undervalued at current levels, with a PEG ratio at 0.78, and P/FCF ratio at 7.14. The stock has gained 15.68% over the last year.

9. Aetna Inc. (NYSE:AET): Operates as a diversified health care benefits company in the United States. Market cap of $14.23B. TTM Diluted EPS at $4.70, MRQ Book Value Per Share at $29.06, Graham number at $55.44 (vs. current price at $40.01, implies a potential upside of 38.55%). It's been a rough couple of days for the stock, losing 5.83% over the last week.

10. Greatbatch, Inc. (NYSE:GB): Provides technology solutions for medical and industrial applications. Market cap of $475.86M. TTM Diluted EPS at $1.74, MRQ Book Value Per Share at $19.84, Graham number at $27.87 (vs. current price at $20.16, implies a potential upside of 38.24%). The stock is a short squeeze candidate, with a short float at 8.03% (equivalent to 11.59 days of average volume). It's been a rough couple of days for the stock, losing 6.53% over the last week.

11. Universal American Corp (NYSE:UAM): Provides health insurance and managed care products and services primarily to the senior population in the United States. Market cap of $977.25M. TTM Diluted EPS at $1.02, MRQ Book Value Per Share at $12.87, Graham number at $17.19 (vs. current price at $12.57, implies a potential upside of 36.72%). It's been a rough couple of days for the stock, losing 5.23% over the last week.

12. Teleflex Incorporated (NYSE:TFX): Develops, manufactures, and supplies single-use medical devices used by hospitals and healthcare providers worldwide. Market cap of $2.38B. TTM Diluted EPS at $5.83, MRQ Book Value Per Share at $47.46, Graham number at $78.90 (vs. current price at $59.31, implies a potential upside of 33.03%). The stock has gained 8.57% over the last year.

*BVPS and EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: 12 Healthcare Stocks Undervalued By The Graham Number