3 Small-Cap Stocks Undervalued By The Graham Number

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 |  Includes: DCOM, DEPO, EBF
by: Kapitall

Small-cap stocks tend to offer higher expected risk with the possibility of higher returns. If you're interested in the small-cap sector, you might be interested in this list.

We ran a screen on small-cap stocks, with market caps between $300 and 500 million. We then screened for those that appear undervalued relative to the Graham number, which serves as a proxy for maximum fair value.

The Graham Number was created by the "godfather of value investing" Benjamin Graham, and it is based off of a stock's EPS and book value per share (BVPS).

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. Stocks trading well below 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 hold value yet to be priced in? Use this list as a starting point for your own analysis.

1. Dime Community Bancshares Inc. (NASDAQ:DCOM): Operates as the holding company for The Dime Savings Bank of Williamsburgh that provides financial services and loans primarily for multifamily housing. Market cap at $496.23M.Performance over the last quarter at 20.80%. Diluted TTM earnings per share at 1.4, and a MRQ book value per share value at 10.78, implies a Graham Number fair value = sqrt(22.5*1.4*10.78) = $18.43. Based on the stock's price at $13.85, this implies a potential upside of 33.05% from current levels.

2. Ennis Inc. (NYSE:EBF): Engages in the production and sale of business forms, other business products, and apparel. Market cap at $424M.Performance over the last quarter at 20.88%. Diluted TTM earnings per share at 1.46, and a MRQ book value per share value at 13.98, implies a Graham Number fair value = sqrt(22.5*1.46*13.98) = $21.43. Based on the stock's price at $15.68, this implies a potential upside of 36.67% from current levels.

3. DepoMed Inc. (NASDAQ:DEPO): Develops and commercializes pharmaceutical products based on its proprietary oral drug delivery technologies in the United States. Market cap at $337.8M.Performance over the last quarter at 24.08%. Diluted TTM earnings per share at 1.55, and a MRQ book value per share value at 2.13, implies a Graham Number fair value = sqrt(22.5*1.55*2.13) = $8.62. Based on the stock's price at $6.29, this implies a potential upside of 37.02% from current levels.

*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.