# 3 Overvalued Stocks Investors May Want To Avoid When Applying Graham's Number

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|  Includes: HL, NAFC, R
by: Matt Schilling

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. (NYSE: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. (NASDAQ: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. (NYSE: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.