Value Ideas: 6 Micro-Cap Stocks Undervalued by Graham's Equation

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(Written by Alexander Crawford. EPS and BVPS data sourced from Yahoo! Finance.)

Do you consider yourself a value investor? If you believe that the market can undervalue stocks, giving profit opportunities to investors keen enough to find them, your answer may be yes.

The difficulty with picking up undervalued names and waiting for the stock to rise to its “fair value” is finding the names in the first place. The concept of “fair value” is rather subjective, so tread carefully.

Graham Equation

For ideas on how to find potentially undervalued stocks, one idea comes from the “godfather of value investing,” Benjamin Graham. He created an equation that calculates the maximum fair value for any stock, and it’s based on only two data points: current earnings per share and current book value per share.

The Graham Number = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share). This equation assumes that a stock is overvalued if P/E is over 15 or P/BV is over 1.5.

Therefore, stocks trading significantly below their Graham Number are “undervalued” according to the equation.

Investing Ideas

To illustrate this technique, we ran a screen on micro-cap stocks, with market caps below $300 million. We screened for micro-cap stocks trading significantly below their Graham Number.

Do you think these stocks should be trading higher?

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

List sorted by trading volume.

1. AM Castle & Co. (CAS): A specialty metals and plastics distribution company. Market cap of $184.55M. Diluted TTM earnings per share at 0.37, and a MRQ book value per share value at 14.11, implies a Graham Number fair value = sqrt(22.5*0.37*14.11) = $10.84. Based on the stock's price at $8.01, this implies a potential upside of 35.31% from current levels.

2. Pantry Inc. (PTRY): Operates convenience store chain in the southeastern United States. Market cap of $248.44M. Diluted TTM earnings per share at 0.66, and a MRQ book value per share value at 13.92, implies a Graham Number fair value = sqrt(22.5*0.66*13.92) = $14.38. Based on the stock's price at $10.83, this implies a potential upside of 32.76% from current levels.

3. Rudolph Technologies Inc. (RTEC): Designs, develops, manufactures, and sells process control defect inspection, metrology, and process control software systems to microelectronics device manufacturers. Market cap of $266.99M. Diluted TTM earnings per share at 0.89, and a MRQ book value per share value at 6.72, implies a Graham Number fair value = sqrt(22.5*0.89*6.72) = $11.60. Based on the stock's price at $8.38, this implies a potential upside of 38.43% from current levels.

4. Tuesday Morning Corp. (TUES): Engages in the retail sale of upscale decorative home accessories, housewares, and gifts. Market cap of $142.06M. Diluted TTM earnings per share at 0.15, and a MRQ book value per share value at 5.98, implies a Graham Number fair value = sqrt(22.5*0.15*5.98) = $4.49. Based on the stock's price at $3.33, this implies a potential upside of 34.91% from current levels.

5. Warren Resources Inc. (WRES): Engages in the exploration, development, and production of onshore crude oil and gas reserves in the United States. Market cap of $206.69M. Diluted TTM earnings per share at 0.27, and a MRQ book value per share value at 2.41, implies a Graham Number fair value = sqrt(22.5*0.27*2.41) = $3.83. Based on the stock's price at $2.89, this implies a potential upside of 32.4% from current levels.

6. 1-800-Flowers.com Inc. (FLWS): Operates as a gift retailer in the United States. Market cap of $148.31M. Diluted TTM earnings per share at 0.16, and a MRQ book value per share value at 2.21, implies a Graham Number fair value = sqrt(22.5*0.16*2.21) = $2.82. Based on the stock's price at $2.28, this implies a potential upside of 23.71% 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 , US Markets

Referenced Stocks: CAS , PTRY , RTEC , TUES , WRES , FLWS

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