Many investors and potential investors have asked me how I determine the value of a specific company's stock. Well, I've been using a technique called Graham's Number - which assumes two very important things - before determining how undervalued or overvalued a stock may be. First, it assumes the company is trading at a P/E ratio of 15 or lower. Second, it assumes that the company's Price/Book Value Ratio is lower than 1.5.
That being said, I wanted to examine three companies that appear to be quite overvalued at their current levels, and given their current Graham Numbers, potential investors may consider a smaller position or even discarding the idea of establishing a position.
After I account for the assumptions, I then use this formula that was created by Benjamin Graham:
Graham's Number = (SQRT) of 22.5 x (Earnings Per Share) x (Price/Book Value)
Note: We also assume we're using the EPS from the trailing twelve months and the Price/Book Value from the most recent quarter.
1. Ryder System, Inc. (R): R currently trades in a 52-week range of $33.95 (52-week low) and $60.38 (52-week high). The stock trades at a P/E ratio of 10.19 (which is lower than the 15 required) and currently has a Price/Book Value of 1.35 (which is under the 1.5 maximum).GN=SQRT (22.5*3.46*1.35)
GN=SQRT (105.1)
GN=10.25
Ryder System closed trading on Monday July 2nd at $35.31/share. If we apply the Graham Number to R, the stock is currently valued at $10.25/share and is considered to be overvalued by 244%. Investors should also note that the company yields 3.2% ($1.16) and pays dividends quarterly.
2. Nash Finch Co. (NAFC): NAFC currently trades in a 52-week range of $19.65 (52-week low) and $38.80 (52-week high). The stock trades at a P/E ratio of 8.44 (which is lower than the 15 required) and currently has a Price/Book Value of 0.64 (which is under the 1.5 maximum).GN=SQRT (22.5*2.59*0.64)
GN=SQRT (37.296)
GN=6.10
Nash Finch closed trading on Monday July 2nd at $21.86/share. If we apply the Graham Number to NAFC, the stock is currently valued at $6.10/share and is considered to be overvalued by 258%. Investors should also note that the company yields 3.4% ($0.72) and pays dividends quarterly.
3. Hecla Mining Co. (HL): HL currently trades in a 52-week range of $3.70 (52-week low) and $8.65 (52-week high). The stock trades at a P/E ratio of 11.97 (which is lower than the 15 required) and currently has a Price/Book Value of 1.18 (which is under the 1.5 maximum).GN=SQRT (22.5*0.4*1.18)
GN=SQRT (10.62)
GN=3.26
Hecla Mining Co. closed trading on Monday July 2nd at $4.79/share. If we apply the Graham Number to HL, the stock is currently valued at $3.26/share and is considered to be overvalued by 46.9%. Investors should also note that the company yields 1.9% ($0.09) and pays dividends quarterly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
