Investing 101: Six Undervalued Stocks Backed by Insider Buying

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(Written by Becca Lipman. List compiled by Eben Esterhuizen, CFA. Insider data sourced from Yahoo Finance, all other data sourced from Finviz.)

Interesting in finding undervalued stocks with bullish indicators?

Below we list six stocks found to be undervalued according to the Graham number. To narrow our screen we searched among the names for those experiencing significant levels of insider buying over the past six months. All stocks have market caps over $300M.

If you're unfamiliar with the implications of these criteria, have no fear, review them here:

Insider Activity: Many analysts follow insider buying trends because, after all, insiders know more about their companies than anyone else. Their investment activity is closely monitored and can tell us a lot about where they feel the business is heading.

Insider buying is represented as a percentage of the share float. Companies experiencing insider buying over the past six months provide an indicator that insiders think the stock is undervalued at current levels. Inversely, insider selling serves as a negative indicator. 

Graham Number: According to Benjamin Graham, a former mentor of Warren Buffett and the so-called “Godfather” of value investing, the Graham Number is the maximum price that a value investor should pay for a given stock. A stock whose share price is below the Graham Number is considered to be undervalued or of good value.

It is a calculation for the fair-value price of a stock based on its earnings per share (EPS) and book value per share (the value of the company's assets divided by the number of shares).

The Graham Number = Square Root of (22.5) x (TTM EPS) x (MRQ Book Value per Share).

We use the Graham Number to screen for potentially undervalued stocks

Note: The market does not price stocks based on the Graham Number, so share prices could increase significantly above the Graham Number, or fall far below it. This is also just one of many ways to value a stock.

Without further ado, here are the six stocks listed with relevant information. Do you think these stocks are truly undervalued? Insiders seem to think so... Use the list below as a starting point for your own analysis.

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1. ATS Corporation (ATSC): Provides software and systems development, systems integration, information sharing and assurance, information technology (IT) infrastructure and outsourcing, and IT and business consulting services primarily to government agencies in the United States. Net insider purchases over the last six months at 460,171 shares, which represents about 7.4% of the company's float of 6.22M shares. Diluted TTM earnings per share at 0.29, and a MRQ book value per share value at 2.65, implies a Graham Number fair value = sqrt(22.5*0.29*2.65) = $4.16. Based on the stock's price at $3.31, this implies a potential upside of 25.63% from current levels.

2. Center Bancorp Inc. (CNBC): Operates as the holding company for Union Center National Bank that provides various banking services to individual and corporate customers in Union and Morris counties, New Jersey. Net insider purchases over the last six months at 474,584 shares, which represents about 3.93% of the company's float of 12.09M shares. Diluted TTM earnings per share at 0.68, and a MRQ book value per share value at 7.39, implies a Graham Number fair value = sqrt(22.5*0.68*7.39) = $10.63. Based on the stock's price at $9., this implies a potential upside of 18.15% from current levels.

3. Skilled Healthcare Group, Inc. (SKH): Operates skilled nursing facilities, assisted living facilities, hospices, home health providers, and a rehabilitation therapy business. Net insider purchases over the last six months at 246,100 shares, which represents about 1.28% of the company's float of 19.18M shares. Diluted TTM earnings per share at 0.21, and a MRQ book value per share value at 7.93, implies a Graham Number fair value = sqrt(22.5*0.21*7.93) = $6.12. Based on the stock's price at $4.73, this implies a potential upside of 29.41% from current levels.

4. Saga Communications Inc. (SGA): Engages in acquiring, developing, and operating radio and television stations. Net insider purchases over the last six months at 26,076 shares, which represents about 0.72% of the company's float of 3.60M shares. Diluted TTM earnings per share at 3.06, and a MRQ book value per share value at 21.38, implies a Graham Number fair value = sqrt(22.5*3.06*21.38) = $38.37. Based on the stock's price at $29.62, this implies a potential upside of 29.53% from current levels.

5. Winthrop Realty Trust (FUR): Engages in the ownership and management of real property and real estate-related assets. Net insider purchases over the last six months at 198,400 shares, which represents about 0.68% of the company's float of 29.16M shares. Diluted TTM earnings per share at 0.68, and a MRQ book value per share value at 10.93, implies a Graham Number fair value = sqrt(22.5*0.68*10.93) = $12.93. Based on the stock's price at $9.46, this implies a potential upside of 36.7% from current levels.

6. RLI Corp. (RLI): RLI Corp., through its subsidiaries, underwrites property and casualty insurance primarily in the United States. Net insider purchases over the last six months at 96,751 shares, which represents about 0.56% of the company's float of 17.20M shares. Diluted TTM earnings per share at 6.68, and a MRQ book value per share value at 41.02, implies a Graham Number fair value = sqrt(22.5*6.68*41.02) = $78.52. Based on the stock's price at $63.24, this implies a potential upside of 24.16% from current levels.



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

Referenced Stocks: ATSC , CNBC , FUR , RLI , SGA , SKH

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