3 Drugmakers Deeply Undervalued By The Graham Number

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 |  Includes: DRRX, FRX, HITK
by: Kapitall

Do you consider yourself a value investor? We ran a screen in the search for potentially undervalued stocks.

We created a universe of drugmakers stocks from the healthcare sector and then screened that universe for those that appear undervalued relative to the Graham Number. The Graham Number is a measure of maximum fair value created by the "godfather of value investing" Benjamin Graham.

It is based off of a stock's EPS and book value per share (BVPS).

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.

For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

Tool provided by Kapitall (kapitall.com).

Do you think these stocks are undervalued? Use this list as a starting point for your own analysis.

List sorted by potential upside implied by the Graham Number.

1. Hi Tech Pharmacal Co. Inc. (HITK): Develops, manufactures, markets, and sells generic, prescription, over-the-counter (OTC), and nutritional products in liquid and semisolid dosage forms in the United States. Market cap at $424.97M, most recent closing price at $32.59. Diluted TTM earnings per share at 3.84, and a MRQ book value per share value at 17.42, implies a Graham Number fair value = sqrt(22.5*3.84*17.42) = $38.80. Based on the stock's price at $29.23, this implies a potential upside of 32.72% from current levels.

2. DURECT Corporation (DRRX): Focuses on the development of pharmaceutical products for pain, central nervous system disorders, cardiovascular disease, and other chronic diseases based on its proprietary drug formulations and delivery platform technologies. Market cap at $105.16M, most recent closing price at $1.20. Diluted TTM earnings per share at 0.21, and a MRQ book value per share value at 0.41, implies a Graham Number fair value = sqrt(22.5*0.21*0.41) = $1.39. Based on the stock's price at $1.12, this implies a potential upside of 24.27% from current levels.

3. Forest Laboratories Inc. (FRX): Develops, manufactures, and sells branded and generic forms of ethical drug products. Market cap at $9.35B, most recent closing price at $35.18. Diluted TTM earnings per share at 3.57, and a MRQ book value per share value at 21.37, implies a Graham Number fair value = sqrt(22.5*3.57*21.37) = $41.43. Based on the stock's price at $35.31, this implies a potential upside of 17.34% from current levels.

*BVPS and EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

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