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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. Murphy Oil Corp. (NYSE:MUR): MUR currently trades in a 52-week range of $40.41 (52-week low) and $70.27 (52-week high). The stock trades at a P/E ratio of 11.21 (which is lower than the 15 required) and currently has a Price/Book Value of 1.07 (which is under the 1.5 maximum).

GN=SQRT (22.5*4.60*1.07)

GN=SQRT (110.745)

GN=10.52

Murphy Oil Corp. closed trading on Tuesday July 3rd at $51.59/share. If we apply the Graham Number to MUR, the stock is currently valued at $10.52/share and is currently trading at 4.9 times its current Graham Value. Investors should also note that the company yields 2.2% ($1.10) and pays dividends quarterly.

2. France Telecom (FTE): FTE currently trades in a 52-week range of $11.68 (52-week low) and $21.01 (52-week high). The stock trades at a P/E ratio of 7.17 (which is lower than the 15 required) and currently has a Price/Book Value of 1.00 (which is under the 1.5 maximum).

GN=SQRT (22.5*1.85*1.00)

GN=SQRT (41.625)

GN=6.45

France Telecom closed trading on Tuesday July 3rd at $13.22/share. If we apply the Graham Number to FTE, the stock is currently valued at $6.45/share and is currently trading at 2.05 times its current Graham Value. Investors should also note that the company yields 12.7% ($1.66) and pays dividends quarterly.

3. Nabors Industries Ltd. (NYSE:NBR): NBR currently trades in a 52-week range of $11.05 (52-week low) and $27.63 (52-week high). The stock trades at a P/E ratio of 14.68 (which is lower than the 15 required) and currently has a Price/Book Value of 0.71 (which is under the 1.5 maximum).

GN=SQRT (22.5*1.01*0.71)

GN=SQRT (16.362)

GN=4.04

Nabors Industries Ltd. closed trading on Tuesday July 3rd at $14.80/share. If we apply the Graham Number to NBR, the stock is currently valued at $4.04/share and is currently trading at 3.66 times its current Graham Value. Investors should also note that the company yields 1.9% ($0.09) and pays dividends quarterly.

Source: 3 More Stocks Heavily Overvalued When Applying Graham's Number