# Is It Possible To 'Graham' The Dow 30?

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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 each component of the Dow 30 and determine two things. First, I wanted to determine how many Dow components meet the maximum requirements to be calculated when using Graham's Number. Second, of those components that do qualify, I wanted to see how many are undervalued or overvalued.

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 (Book Value Per Share)

A Chart Demonstrating Qualifying Criteria

 Symbol Price P/E Price/Book Book Value EPS Status GN (MMM) 89.70 14.8 3.83 23.32 6.06 DNQ - P/B N/A (AA) 8.90 24.38 0.65 13.21 0.37 DNQ - P/E N/A (AXP) 59.41 14.07 3.45 17.07 4.22 DNQ - P/B N/A (T) 36.00 51.87 2.03 17.86 0.69 DNQ - Both N/A (BAC) 8.06 N/A 0.41 19.83 (0.13) DNQ - P/E N/A (BA) 74.27 12.86 10.9 6.71 5.78 DNQ - P/B N/A (CAT) 86.46 10.90 3.65 22.95 7.93 DNQ - P/B N/A (CVX) 107.37 7.88 1.66 63.61 13.62 DNQ - P/B N/A (CSCO) 17.15 12.63 1.79 9.54 1.36 DNQ - P/B N/A (KO) 79.16 21.05 5.43 14.54 3.76 DNQ - Both N/A (DIS) 48.59 17.41 2.33 20.93 2.79 DNQ - Both N/A (DD) 49.59 13.29 4.76 10.38 3.73 DNQ - P/B N/A (XOM) 86.28 10.42 2.54 33.58 8.28 DNQ - P/B N/A (GE) 20.43 16.90 1.81 11.32 1.21 DNQ - Both N/A (HPQ) 20.36 7.92 0.97 20.87 2.57 Qualifies 34.73 (HD) 51.65 19.46 4.51 11.75 2.65 DNQ - Both N/A (IBM) 195.93 14.61 10.91 17.95 13.41 DNQ - P/B N/A (INTC) 26.86 11.36 2.85 9.34 2.36 DNQ - P/B N/A (JNJ) 68.04 18.66 3.04 22.35 3.65 DNQ - Both N/A (JPM) 35.88 7.97 0.76 47.61 4.50 Qualifies 69.43 (KFT) 39.21 19.61 1.87 20.85 2.00 DNQ - Both N/A (MCD) 88.58 16.55 6.11 14.43 5.35 DNQ - Both N/A (MRK) 41.81 18.66 2.32 18.03 2.24 DNQ - Both N/A (MSFT) 30.76 11.27 3.74 8.17 2.73 DNQ - P/B N/A (PFE) 22.87 18.55 2.07 11.11 1.23 DNQ - Both N/A (PG) 61.36 18.81 2.62 23.38 3.26 DNQ - Both N/A (TRV) 64.13 19.06 1.00 63.81 3.37 DNQ - P/E N/A (UTX) 75.75 15.95 3.04 24.68 4.75 DNQ - P/E N/A (VZ) 44.95 48.23 3.48 12.91 0.93 DNQ - Both N/A (WMT) 70.75 15.24 3.41 20.31 4.64 DNQ - Both N/A

Based on my statistical approach to answering the question I posed in the title of the article, the answer is, no we can 'Graham' the Dow 30, because 28 of the 30 Dow components do not qualify based on the P/E Ratio Maximum of 15 and the Price/Book Ratio Maximum of 1.5. Of the two companies that do qualify, Hewlett-Packard and JP Morgan Chase, both companies appear to be significantly undervalued relative to their share price. Potential investors should consider positions in most Dow 30 stocks from either an income or growth standpoint, and small to medium sized positions should be established at current levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.