30 Large Caps Undervalued By The Graham Number

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The following is a list of stocks with market caps above $10B. Additionally, all of these names are undervalued when comparing the current price to the fair value price, calculated by the Graham Number equation.

Benjamin Graham, the man who developed this equation, 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 (Earnings per Share) x (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.

Do you agree with the godfather of value investing on this one? If so, which of these stocks do you find to be most undervalued? Full details below.

Graham input data sourced from Yahoo Finance, short float and performance data sourced from Finviz.

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List sorted by percentage change in short interest.

1. PNC Financial Services Group Inc. (PNC): Money Center Banks Industry. Market cap of $32.28B. BVPS at $56.26, diluted EPS at $5.74. Graham number = sqrt(22.5 x $56.26 x $5.74) = $85.24. Current price at $61.4, which implies a potential upside of 38.83%. The stock has gained 3.4% over the last year.

2. Aetna Inc. (AET): Health Care Plans Industry. Market cap of $13.62B. BVPS at $25.73, diluted EPS at $4.18. Graham number = sqrt(22.5 x $25.73 x $4.18) = $49.19. Current price at $35.46, which implies a potential upside of 38.73%. Might be undervalued at current levels, with a PEG ratio at 0.76, and P/FCF ratio at 12.13. The stock has gained 1.37% over the last year.

3. Eni SpA (E): Major Integrated Oil & Gas Industry. Market cap of $96.53B. BVPS at $39.56, diluted EPS at $4.87. Graham number = sqrt(22.5 x $39.56 x $4.87) = $65.84. Current price at $48.15, which implies a potential upside of 36.74%. The stock has gained 9.57% over the last year.

4. China Petroleum & Chemical Corp. (SNP): Independent Oil & Gas Industry. Market cap of $85.39B. BVPS at $70.8, diluted EPS at $11.7. Graham number = sqrt(22.5 x $70.8 x $11.7) = $136.52. Current price at $99.87, which implies a potential upside of 36.7%. The stock has gained 25.55% over the last year.

5. Sun Life Financial Inc. (SLF): Life Insurance Industry. Market cap of $18.12B. BVPS at $29.18, diluted EPS at $2.83. Graham number = sqrt(22.5 x $29.18 x $2.83) = $43.1. Current price at $31.68, which implies a potential upside of 36.06%. The stock has gained 5.13% over the last year.

6. JPMorgan Chase & Co. (JPM): Money Center Banks Industry. Market cap of $181.13B. BVPS at $43.06, diluted EPS at $3.96. Graham number = sqrt(22.5 x $43.06 x $3.96) = $61.94. Current price at $45.58, which implies a potential upside of 35.89%. The stock has gained 2.5% over the last year.

7. France Telecom (FTE): Telecom Services - Foreign Industry. Market cap of $58.52B. BVPS at $15.37, diluted EPS at $2.55. Graham number = sqrt(22.5 x $15.37 x $2.55) = $29.7. Current price at $22.01, which implies a potential upside of 34.92%. Relatively low correlation to the market (beta = 0.78), which may be appealing to risk averse investors. The stock has had a couple of great days, gaining 5.8% over the last week.

8. AT&T, Inc. (T): Telecom Services - Domestic Industry. Market cap of $166.11B. BVPS at $18.89, diluted EPS at $3.35. Graham number = sqrt(22.5 x $18.89 x $3.35) = $37.73. Current price at $28.19, which implies a potential upside of 33.85%. Relatively low correlation to the market (beta = 0.66), which may be appealing to risk averse investors. The stock has gained 12.63% over the last year.

9. LG Display Co., Ltd. (LPL): Diversified Electronics Industry. Market cap of $10.98B. BVPS at $13.68, diluted EPS at $1.4. Graham number = sqrt(22.5 x $13.68 x $1.4) = $20.76. Current price at $15.55, which implies a potential upside of 33.5%. The stock has lost 11.63% over the last year.

10. SK Telecom Co. Ltd. (SKM): Wireless Communications Industry. Market cap of $11.67B. BVPS at $15.2, diluted EPS at $1.68. Graham number = sqrt(22.5 x $15.2 x $1.68) = $23.97. Current price at $17.99, which implies a potential upside of 33.24%. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 4.36%, current ratio at 1.43, and quick ratio at 1.41. The stock has gained 5.47% over the last year.

11. UBS AG (UBS): Foreign Money Center Banks Industry. Market cap of $36.83B. BVPS at $13.23, diluted EPS at $2.0. Graham number = sqrt(22.5 x $13.23 x $2.0) = $24.4. Current price at $18.34, which implies a potential upside of 33.04%. The stock has gained 18.22% over the last year.

12. Hitachi Ltd. (HIT): Electronic Equipment Industry. Market cap of $24.57B. BVPS at $39.29, diluted EPS at $5.79. Graham number = sqrt(22.5 x $39.29 x $5.79) = $71.54. Current price at $54.44, which implies a potential upside of 31.42%. After a solid performance over the last year, HIT has pulled back during recent sessions. The stock is -5.17% below its SMA20 and -5.1% below its SMA50, but remains 15.4% above its SMA200. The stock has had a couple of great days, gaining 8.82% over the last week.

13. Kyocera Corp. (KYO): Diversified Electronics Industry. Market cap of $18.48B. BVPS at $91.29, diluted EPS at $7.69. Graham number = sqrt(22.5 x $91.29 x $7.69) = $125.68. Current price at $95.85, which implies a potential upside of 31.12%. The stock has had a couple of great days, gaining 8.76% over the last week.

14. Petroleo Brasileiro (PBR): Oil & Gas Drilling & Exploration Industry. Market cap of $255.91B. BVPS at $28.27, diluted EPS at $4.29. Graham number = sqrt(22.5 x $28.27 x $4.29) = $52.24. Current price at $40.44, which implies a potential upside of 29.17%. The stock has lost 11.69% over the last year.

15. Loews Corporation (L): Property & Casualty Insurance Industry. Market cap of $17.79B. BVPS at $44.51, diluted EPS at $3.06. Graham number = sqrt(22.5 x $44.51 x $3.06) = $55.36. Current price at $42.99, which implies a potential upside of 28.77%. The stock has gained 15.56% over the last year.

16. Brookfield Asset Management Inc. (BAM): Asset Management Industry. Market cap of $18.22B. BVPS at $31.19, diluted EPS at $2.33. Graham number = sqrt(22.5 x $31.19 x $2.33) = $40.44. Current price at $31.42, which implies a potential upside of 28.7%. The stock has gained 28.06% over the last year.

17. Entergy Corporation (ETR): Electric Utilities Industry. Market cap of $11.98B. BVPS at $47.53, diluted EPS at $6.66. Graham number = sqrt(22.5 x $47.53 x $6.66) = $84.39. Current price at $66.83, which implies a potential upside of 26.28%. Relatively low correlation to the market (beta = 0.64), which may be appealing to risk averse investors. The stock is currently stuck in a downtrend, trading -5.01% below its SMA20, -6.39% below its SMA50, and -8.58% below its SMA200. The stock has lost 12.7% over the last year.

18. MetLife, Inc. (MET): Life Insurance Industry. Market cap of $47.04B. BVPS at $46.08, diluted EPS at $3.0. Graham number = sqrt(22.5 x $46.08 x $3.0) = $55.77. Current price at $44.39, which implies a potential upside of 25.64%. The stock has gained 7.58% over the last year.

19. Credit Suisse Group (CS): Foreign Money Center Banks Industry. Market cap of $51.25B. BVPS at $30.67, diluted EPS at $4.21. Graham number = sqrt(22.5 x $30.67 x $4.21) = $53.9. Current price at $43.02, which implies a potential upside of 25.29%. The stock has lost 11.4% over the last year.

20. Northrop Grumman Corporation (NOC): Conglomerates Industry. Market cap of $19.80B. BVPS at $46.6, diluted EPS at $6.82. Graham number = sqrt(22.5 x $46.6 x $6.82) = $84.56. Current price at $67.65, which implies a potential upside of 25.0%. The stock has gained 7.58% over the last year.

21. The Goldman Sachs Group, Inc. (GS): Diversified Investments Industry. Market cap of $83.69B. BVPS at $128.68, diluted EPS at $13.18. Graham number = sqrt(22.5 x $128.68 x $13.18) = $195.35. Current price at $159.94, which implies a potential upside of 22.14%. The stock has lost 7.17% over the last year.

22. POSCO (PKX): Steel & Iron Industry. Market cap of $34.57B. BVPS at $88.98, diluted EPS at $9.31. Graham number = sqrt(22.5 x $88.98 x $9.31) = $136.53. Current price at $112.67, which implies a potential upside of 21.17%. The stock has had a couple of great days, gaining 5.43% over the last week.

23. NTT DOCOMO, Inc. (DCM): Wireless Communications Industry. Market cap of $75.89B. BVPS at $14.24, diluted EPS at $1.53. Graham number = sqrt(22.5 x $14.24 x $1.53) = $22.14. Current price at $18.31, which implies a potential upside of 20.92%. Relatively low correlation to the market (beta = 0.2), which may be appealing to risk averse investors. The stock has had a couple of great days, gaining 6.29% over the last week.

24. The Bank of New York Mellon Corporation (BK): Asset Management Industry. Market cap of $36.19B. BVPS at $26.06, diluted EPS at $2.06. Graham number = sqrt(22.5 x $26.06 x $2.06) = $34.75. Current price at $29.1, which implies a potential upside of 19.43%. Relatively low correlation to the market (beta = 0.73), which may be appealing to risk averse investors. The stock has lost 5.85% over the last year.

25. PPL Corporation (PPL): Electric Utilities Industry. Market cap of $11.85B. BVPS at $16.98, diluted EPS at $2.16. Graham number = sqrt(22.5 x $16.98 x $2.16) = $28.73. Current price at $24.41, which implies a potential upside of 17.68%. Relatively low correlation to the market (beta = 0.46), which may be appealing to risk averse investors. The stock has lost 9.7% over the last year.

26. CVS Caremark Corporation (CVS): Drug Stores Industry. Market cap of $45.71B. BVPS at $27.66, diluted EPS at $2.49. Graham number = sqrt(22.5 x $27.66 x $2.49) = $39.37. Current price at $33.46, which implies a potential upside of 17.65%. Relatively low correlation to the market (beta = 0.79), which may be appealing to risk averse investors. The stock has lost 5.89% over the last year.

27. American Electric Power Co., Inc. (AEP): Electric Utilities Industry. Market cap of $16.43B. BVPS at $28.33, diluted EPS at $2.53. Graham number = sqrt(22.5 x $28.33 x $2.53) = $40.16. Current price at $34.55, which implies a potential upside of 16.23%. Relatively low correlation to the market (beta = 0.59), which may be appealing to risk averse investors. The stock has gained 4.62% over the last year.

28. CenturyLink, Inc. (CTL): Telecom Services - Domestic Industry. Market cap of $12.50B. BVPS at $31.62, diluted EPS at $3.13. Graham number = sqrt(22.5 x $31.62 x $3.13) = $47.19. Current price at $40.9, which implies a potential upside of 15.38%. Relatively low correlation to the market (beta = 0.73), which may be appealing to risk averse investors. The stock is a short squeeze candidate, with a short float at 10.03% (equivalent to 7.24 days of average volume). The stock has gained 24.63% over the last year.

29. Archer Daniels Midland Company (ADM): Farm Products Industry. Market cap of $22.97B. BVPS at $24.94, diluted EPS at $3.03. Graham number = sqrt(22.5 x $24.94 x $3.03) = $41.23. Current price at $36.11, which implies a potential upside of 14.19%. Relatively low correlation to the market (beta = 0.25), which may be appealing to risk averse investors. The stock has gained 25.4% over the last year.

30. HSBC Holdings plc (HBC): Foreign Money Center Banks Industry. Market cap of $181.57B. BVPS at $42.13, diluted EPS at $3.6. Graham number = sqrt(22.5 x $42.13 x $3.6) = $58.42. Current price at $51.3, which implies a potential upside of 13.87%. The stock has performed poorly over the last month, losing 11.41%.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


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