3 Retailers Undervalued By Free Cash Flows And The Graham Number

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Includes: DDS, RSH, SMRT
by: Kapitall

Do you consider yourself a value investor? If you prefer stocks that you believe are underestimated and trading below their fair value, your answer might be yes.

We ran a screen with this idea in mind, beginning with stocks of the retail sector that appear undervalued relative to free cash flows, with P/FCF below 15. Since 15 is considered a fair value level for most companies, those with ratios below 15 may be undervalued relative to their free cash flows.

We then screened for those that also appear undervalued relative to the Graham Number. The Graham Number is a measure of maximum fair value created by the "godfather of value investing" Benjamin Graham.

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 market cap 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 the Graham Number.

1. Dillard's Inc. (NYSE:DDS): Operates as an apparel and home furnishing retailer in the United States. Market cap at $3.27B, most recent closing price at $65.66. P/FCF at 8.71. Diluted TTM earnings per share at 8.52, and a MRQ book value per share value at 41.5, implies a Graham Number fair value = sqrt(22.5*8.52*41.5) = $89.19. Based on the stock's price at $64.99, this implies a potential upside of 37.24% from current levels.

2. RadioShack Corp. (NYSE:RSH): Engages in the retail sale of consumer electronic goods and services through its RadioShack store chain and kiosk operations. Market cap at $499.14M, most recent closing price at $5.07. P/FCF at 4.36. Diluted TTM earnings per share at 0.28, and a MRQ book value per share value at 7.44, implies a Graham Number fair value = sqrt(22.5*0.28*7.44) = $6.85. Based on the stock's price at $5.36, this implies a potential upside of 27.73% from current levels.

3. Stein Mart Inc. (NASDAQ:SMRT): Operates retail stores that offer fashion merchandise for women and men in the United States. Market cap at $271.49M, most recent closing price at $6.24. P/FCF at 10.39. Diluted TTM earnings per share at 0.44, and a MRQ book value per share value at 5.95, implies a Graham Number fair value = sqrt(22.5*0.44*5.95) = $7.67. Based on the stock's price at $6.54, this implies a potential upside of 17.35% 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.