Seeking Alpha

In recent months, when asked how I determine the value of particular stock, I've answered many fellow investors with the formula for Graham's Number. I've been using this technique for a while now and it needs to be noted, that the formula assumes two very important things - before determining how undervalued or overvalued a stock may be. It first 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 7 REITs yielding at least 13% and determine how undervalued they are when applying the Graham Number. The REITs are American Capital Agency Corp. (AGNC), Chimera Investment Corp. (CIM), Two Harbors (TWO), Armour Residential (ARR), Invesco (IVR), Resource Capital (RSO) and Cypress Sharpridge (CYS).

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 AGNC 34.02 5.12 1.17 29.06 6.69 Qualified 66.13 CIM 2.37 4.32 0.73 3.27 0.55 Qualified 6.36 TWO 10.69 9.15 1.11 9.67 1.17 Qualified 15.95 ARR 7.35 13.87 1.08 6.79 0.53 Qualified 8.99 IVR 18.75 6.13 1.02 18.4 3.06 Qualified 35.59 RSO 5.44 10.64 0.98 5.57 0.51 Qualified 7.99 CYS 14.07 10.77 1.07 13.14 1.31 Qualified 19.67

As a result of my calculations, these 7 REITs screened are considered to be undervalued by a significant amount:

• CIM closed trading on Thursday at \$2.37/share, and has a calculated Graham Number of \$6.36/share. That results in the fact that the stock is trading at a 62% discount to its Graham Number Value. With regard to CIM, investors should note that company currently yields 15% (\$0.36), and trades in a 52-week range of \$2.27/share (52-week low) and \$3.52/share (52-week high).
• TWO closed trading on Thursday at \$10.69/share, and has a calculated Graham Number of \$15.95/share. That results in the fact that the stock is trading at a 33% discount to its Graham Number Value. With regard to TWO, investors should note that company currently yields 15% (\$1.60), and trades in a 52-week range of \$7.72/share (52-week low) and \$10.98/share (52-week high).
• AGNC closed trading on Thursday at \$34.02/share, and has a calculated Graham Number of \$66.13/share. That results in the fact that the stock is trading at a 48.5% discount to its Graham Number Value. With regard to AGNC, investors should note that company currently yields 14.7% (\$5.00), and trades in a 52-week range of \$22.03/share (52-week low) and \$34.20/share (52-week high).
• ARR closed trading on Thursday at \$7.35/share, and has a calculated Graham Number of \$8.99/share. That results in the fact that the stock is trading at an 18.25% discount to its Graham Number Value. With regard to ARR, investors should note that company currently yields 16.5% (\$1.20), and trades in a 52-week range of \$5.40/share (52-week low) and \$7.71/share (52-week high).
• IVR closed trading on Thursday at \$18.75/share, and has a calculated Graham Number of \$35.59/share. That results in the fact that the stock is trading at a 47.4% discount to its Graham Number Value. With regard to IVR, investors should note that company currently yields 16.5% (\$1.20), and trades in a 52-week range of \$5.40/share (52-week low) and \$7.71/share (52-week high).
• RSO closed trading on Thursday at \$5.44/share, and has a calculated Graham Number of \$7.99/share. That results in the fact that the stock is trading at a 32% discount to its Graham Number Value. With regard to RSO, investors should note that company currently yields 14.7% (\$0.80), and trades in a 52-week range of \$4.20/share (52-week low) and \$6.47/share (52-week high).
• CYS closed trading on Thursday at \$14.07/share, and has a calculated Graham Number of \$19.67/share. That results in the fact that the stock is trading at a 28.5% discount to its Graham Number Value. With regard to CYS, investors should note that the company currently yields 14.2% (\$2.00), and trades in a 52-week range of \$10.52/share (52-week low) and \$14.28 (52-week high).

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