# 14 Deeply Undervalued Stocks for Your Watchlist

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Includes: AEA, CMTL, CYH, DOLNQ, EDMC, GLDD, GME, GTN, HSBC, NATL, NSIT, PSS, RT, TMK
by: Kapitall

When you suspect that a stock is undervalued, checking several measures of value can help verify your suspicions. Here we did just that, searching for stocks that meet three different criteria for being underpriced.

We began by searching for stocks with low absolute Price to Earnings Growth ratios (PEG < 1), and low absolute Price/Free Cash Flow ratios (P/FCF < 10). From these stocks, we searched for those that were also undervalued relative to the Graham number.

Benjamin Graham, the man who developed the equation for the Graham number, was a former mentor of Warren Buffett and is the so-called "Godfather" of value investing.

The Graham Number, or the maximum price an investor should pay for a stock, is derived using only two data points: current earnings per share and current book value per share.

The Graham Number = Fair Value of a Stock = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share).

The math of the Graham number is relatively straightforward. It is predicated on the belief that the price-to-earnings (P/EPS) ratio should be no more than 15, and the price-to-book value (P/BVPS) ratio should be no more than 1.5. Therefore we only include companies that meet both of these criteria.

From these criteria, the product of the two should not be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5, from which the equation was created.

We ultimately found 14 companies that met all of these requirements to appear undervalued, and we listed them below along with the other price multiples indicating underpricing.

Do you think these stocks should be priced higher? Use this list as a starting-off point for your own analysis.

List sorted by potential upside implied by the graham equation.

We also created an equal weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

1. Advance America, Cash Advance Centers Inc. (NYSE:AEA): Credit Services Industry. Market cap of \$364.57M. PEG at 0.67. P/FCF at 3.3. BVPS at \$4.00, diluted EPS at \$0.65. Graham number = sqrt(22.5 x \$4.00 x \$0.65) = \$7.65. Current price at \$5.87 (implies a potential upside of 30.30%). This is a risky stock that is significantly more volatile than the overall market (beta = 3.03). AEA is exhibiting strong upside momentum--currently trading 10.11% above its SMA20, 12.19% above its SMA50, and 20.06% above its SMA200. The stock has had a good month, gaining 13.37%.

2. Comtech Telecommunications Corp. (NASDAQ:CMTL): Communication Equipment Industry. Market cap of \$748.39M. PEG at 0.33. P/FCF at 5.63. BVPS at \$25.61, diluted EPS at \$2.42. Graham number = sqrt(22.5 x \$25.61 x \$2.42) = \$37.34. Current price at \$28.44 (implies a potential upside of 31.30%). CMTL is a short squeeze candidate, with a short float at 8.05% (equivalent to 8.61 days of average volume). The stock has lost 7.34% over the last year.

3. Community Health Systems, Inc. (NYSE:CYH): Hospitals Industry. Market cap of \$2.91B. PEG at 0.79. P/FCF at 7.61. BVPS at \$25.20, diluted EPS at \$2.92. Graham number = sqrt(22.5 x \$25.20 x \$2.92) = \$40.69. Current price at \$30.88 (implies a potential upside of 31.77%). The stock has performed poorly over the last month, losing 24.94%.

4. The Dolan Company (NYSE:DM): Periodicals Industry. Market cap of \$361.71M. PEG at 0.65. P/FCF at 6.54. BVPS at \$9.24, diluted EPS at \$1.08. Graham number = sqrt(22.5 x \$9.24 x \$1.08) = \$14.98. Current price at \$11.70 (implies a potential upside of 28.07%). The stock has lost 5.7% over the last year.

5. Education Management Corporation (NASDAQ:EDMC): Education & Training Services Industry. Market cap of \$1.43B. PEG at 0.71. P/FCF at 6.92. BVPS at \$15.78, diluted EPS at \$1.72. Graham number = sqrt(22.5 x \$15.78 x \$1.72) = \$24.71. Current price at \$19.55 (implies a potential upside of 26.40%). The stock is a short squeeze candidate, with a short float at 6.82% (equivalent to 23.2 days of average volume). The stock has performed poorly over the last month, losing 13.61%.

6. Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD): Heavy Construction Industry. Market cap of \$394.87M. PEG at 0.35. P/FCF at 4.19. BVPS at \$4.78, diluted EPS at \$0.47. Graham number = sqrt(22.5 x \$4.78 x \$0.47) = \$7.11. Current price at \$6.61 (implies a potential upside of 7.56%). The stock is a short squeeze candidate, with a short float at 5.06% (equivalent to 5.9 days of average volume). It's been a rough couple of days for the stock, losing 9.8% over the last week.

7. GameStop Corp. (NYSE:GME): Electronics Stores Industry. Market cap of \$3.58B. PEG at 0.64. P/FCF at 9.1. BVPS at \$19.84, diluted EPS at \$2.65. Graham number = sqrt(22.5 x \$19.84 x \$2.65) = \$34.39. Current price at \$25.55 (implies a potential upside of 34.62%). The stock is a short squeeze candidate, with a short float at 27.29% (equivalent to 8.22 days of average volume). The stock has gained 12.75% over the last year.

8. Gentiva Health Services Inc. (NASDAQ:GTIV): Home Health Care Industry. Market cap of \$769.51M. PEG at 0.87. P/FCF at 6.09. BVPS at \$21.08, diluted EPS at \$1.71. Graham number = sqrt(22.5 x \$21.08 x \$1.71) = \$28.48. Current price at \$25.00 (implies a potential upside of 13.92%). The stock is a short squeeze candidate, with a short float at 5.19% (equivalent to 7.78 days of average volume). It's been a rough couple of days for the stock, losing 9.89% over the last week.

9. HSBC Holdings plc (HBC): Foreign Money Center Banks Industry. Market cap of \$187.61B. PEG at 0.36. P/FCF at 3.89. BVPS at \$42.13, diluted EPS at \$3.60. Graham number = sqrt(22.5 x \$42.13 x \$3.60) = \$58.42. Current price at \$53.05 (implies a potential upside of 10.12%). The stock has gained 16.57% over the last year.

10. National Interstate Corporation (NASDAQ:NATL): Property & Casualty Insurance Industry. Market cap of \$418.15M. PEG at 0.91. P/FCF at 5.89. BVPS at \$15.99, diluted EPS at \$2.03. Graham number = sqrt(22.5 x \$15.99 x \$2.03) = \$27.02. Current price at \$21.45 (implies a potential upside of 25.99%). The stock has gained 14.97% over the last year.

11. Insight Enterprises Inc. (NASDAQ:NSIT): Application Software Industry. Market cap of \$772.75M. PEG at 0.68. P/FCF at 9.63. BVPS at \$11.76, diluted EPS at \$1.61. Graham number = sqrt(22.5 x \$11.76 x \$1.61) = \$20.64. Current price at \$16.89 (implies a potential upside of 22.20%). This is a risky stock that is significantly more volatile than the overall market (beta = 2.6). The stock has gained 14.07% over the last year.

12. Collective Brands, Inc. (NYSE:PSS): Apparel Stores Industry. Market cap of \$1.21B. PEG at 0.96. P/FCF at 6.97. BVPS at \$13.39, diluted EPS at \$1.75. Graham number = sqrt(22.5 x \$13.39 x \$1.75) = \$22.96. Current price at \$19.21 (implies a potential upside of 19.53%). The stock is a short squeeze candidate, with a short float at 14.1% (equivalent to 9.21 days of average volume). It's been a rough couple of days for the stock, losing 6.24% over the last week.

13. Ruby Tuesday, Inc. (NYSE:RT): Restaurants Industry. Market cap of \$668.58M. PEG at 0.93. P/FCF at 7.44. BVPS at \$9.05, diluted EPS at \$0.83. Graham number = sqrt(22.5 x \$9.05 x \$0.83) = \$13.00. Current price at \$10.54 (implies a potential upside of 23.34%). The stock has performed poorly over the last month, losing 23.19%.

14. Torchmark Corp. (NYSE:TMK): Life Insurance Industry. Market cap of \$5.10B. PEG at 0.97. P/FCF at 5.26. BVPS at \$50.68, diluted EPS at \$6.17. Graham number = sqrt(22.5 x \$50.68 x \$6.17) = \$83.88. Current price at \$65.92 (implies a potential upside of 27.24%). The stock has gained 35.44% over the last year.

*BVPS and diluted EPS 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.