One popular approach to investing based on Benjamin Graham's methods is to use the so-called "Graham Number." There are some important differences between the Graham Number and the Graham Formula, but using the Graham Number is definitely useful even if the investor only uses it as a screening tactic.
I have selected the best companies reviewed by ModernGraham which trade below their Graham Number. The companies selected all are found suitable for the Defensive Investor or the Enterprising Investor. Additionally, they have been determined to be undervalued based on the ModernGraham valuation model. Further, the overall screen found 36 companies meeting these criteria (out of over 897 companies covered). The full list can be found near the end of this article. To cut down on the length of the post, I selected 10 stocks trading the furthest below their Graham Number.
Defensive Investors are defined as investors who are not able or willing to do substantial research into individual investments, and therefore need to select only the companies that present the least amount of risk. Enterprising Investors, on the other hand, are able to do substantial research and can select companies that present a moderate (though still low) amount of risk. Each company suitable for the Defensive Investor is also suitable for Enterprising Investors.
These companies have demonstrated strong financial positions through passing the rigorous requirements of the ModernGraham Investor and show potential for capital growth based on their current price in relation to intrinsic value. As such, these Graham number stocks may be a great investment if they prove to be suitable for your portfolio after your own additional research.
Capital One Financial Corp. (COF, Financial)
Capital One is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last 10 years. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $5.15 in 2012 to an estimated $7.13 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.05% annual earnings growth over the next seven to 10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham's formula, returns an estimate of intrinsic value above the price. (See the full valuation)
Celestica Inc. (TSX:CLS, Financial)
Celestica is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, insufficient earnings stability or growth over the last 10 years and the poor dividend history. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from 29 cents in 2012 to an estimated 98 cents for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 4% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Celestica revealed the company was trading below its Graham Number of $20.71. The company does not pay a dividend. Its PEmg (price over earnings per share) was 16.51, below the industry average of 28.12, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its net current asset value (NCAV) of $6.81. (See the full valuation)
Foot Locker Inc. (FL, Financial)
Foot Locker is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last 10 years and the high price-book (P/B) ratio. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $2.16 in 2014 to an estimated $4.47 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 4.23% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Foot Locker revealed the company was trading above its Graham Number of $48.72. The company pays a dividend of $1.1 per share for a yield of 1.5%. Its PEmg was 16.96, below the industry average of 50.09, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $11.28. (See the full valuation)
Kelly Services Inc. (KELYA, Financial)
Kelly Services is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, low current ratio, insufficient earnings stability or growth over the last 10 years and the poor dividend history. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $1.1 in 2013 to an estimated $1.8 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.74% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Kelly Services revealed the company was trading below its Graham Number of $30.13. The company pays a dividend of 28 cents per share for a yield of 1.3%. Its PEmg was 11.99, below the industry average of 21.9, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $5.19. (See the full valuation)
Signet Jewelers Ltd. (SIG, Financial)
Signet Jewelers is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last 10 years and the poor dividend history. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $2.84 in 2013 to an estimated $5.77 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 3.39% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Signet Jewelers revealed the company was trading above its Graham Number of $71.41. The company pays a dividend of $1 per share for a yield of 1.1%. Its PEmg was 15.29, below the industry average of 26.36, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $4.06. (See the full valuation)
Starwood Property Trust Inc. (STWD, Financial)
Starwood is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last 10 years and the poor dividend history. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be fairly valued after growing its EPSmg from $1.5 in 2013 to an estimated $1.87 for 2017. This level of demonstrated earnings growth supports the market's implied estimate of 1.84% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Starwood revealed the company was trading below its Graham Number of $29.28. The company pays a dividend of $1.92 per share for a yield of 8.4%, putting it among the best dividend-paying stocks today. Its PEmg was 12.17, below the industry average of 51.63, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)
Lincoln National Corp. (LNC, Financial)
Lincoln National is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last 10 years. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $2.04 in 2012 to an estimated $5.16 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.12% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price. (See the full valuation)
Canadian Western Bank (TSX:CWB, Financial)
Canadian Western qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company's strong financial position . The Enterprising Investor has no initial concerns. As a result, all value investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $2.14 in 2013 to an estimated $2.69 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.1% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Canadian Western revealed the company was trading below its Graham Number of $36.05. The company pays a dividend of 92 cents per share for a yield of 3.2%, putting it among the best dividend-paying stocks today. Its PEmg was 10.7, below the industry average of 21.43, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)
Citigroup is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last 10 years and the poor dividend history. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $-2.31 in 2012 to an estimated $4.1 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.16% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price. (See the full valuation)
Linamar Corp. (TSX:LNR)
Linamar is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and insufficient earnings stability over the last 10 years. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg from $2.22 in 2013 to an estimated $6.93 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.1% annual earnings growth over the next seven to 10 years. As a result, the valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Linamar revealed the company was trading below its Graham Number of $83.15. The company pays a dividend of 40 cents per share for a yield of 0.7%. Its PEmg was 8.7, below the industry average of 18.47, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its NCAV of $-7.49. (See the full valuation)
The full list
To view the MG Value and PEmg information, you must be logged in as a premium member of ModernGraham. Clicking on the company name will take you to the company's latest valuation.
For the investor type, a "D" indicates the company is suitable for the Defensive Investor, an "E" indicates the company is suitable for the Enterprising Investor and an "S" indicates the company is considered speculative at this time.
| Ticker | Name with Link | Investor Type | Latest Valuation Date | MG Value | Recent Price | Price as a percent of Value | PEmg Ratio | Div. Yield | Graham Number |
| AFL | AFLAC Inc. | D | Dec. 19, 2016 | --- | $79.84 | --- | --- | 2.05% | $87.98 |
| AHL | Aspen Insurance Holdings Ltd. | E | Dec.13, 2016 | --- | $46.75 | --- | --- | 1.84% | $82.44 |
| ARW | Arrow Electronics, Inc. | E | July 3, 2016 | --- | $74.23 | --- | --- | 0.00% | $81.27 |
| ASH | Ashland Global Holdings Inc. | E | July 27, 2016 | --- | $60.98 | --- | --- | 2.56% | $73.88 |
| BAC | Bank of America Corp. | E | July 14, 2016 | --- | $23.62 | --- | --- | 0.85% | $23.92 |
| BBBY | Bed Bath & Beyond Inc. | D | June 14, 2016 | --- | $27.27 | --- | --- | 0.00% | $41.96 |
| C | Citigroup Inc. | E | July 19, 2016 | --- | $66.58 | --- | --- | 0.30% | $85.07 |
| CNO | CNO Financial Group Inc. | E | Jan. 28 | --- | $22.31 | --- | --- | 1.34% | $24.73 |
| COF | Capital One Financial Corp. | E | July 6, 2016 | --- | $81.53 | --- | --- | 1.96% | $122.14 |
| CVG | Convergys Corp. | E | March 18 | --- | $22.92 | --- | --- | 1.53% | $23.70 |
| DFS | Discover Financial Services | D | Jan. 28 | --- | $59.43 | --- | --- | 1.95% | $62.08 |
| FL | Foot Locker, Inc. | E | March 6 | --- | $34.38 | --- | --- | 3.20% | $48.72 |
| KBH | KB Home | E | Feb. 4 | --- | $22.21 | --- | --- | 0.45% | $25.21 |
| KELYA | Kelly Services Inc. | E | Feb. 7 | --- | $21.37 | --- | --- | 1.31% | $30.13 |
| LNC | Lincoln National Corp. | E | May 20, 2016 | --- | $68.02 | --- | --- | 1.62% | $89.07 |
| MET | MetLife Inc. | E | Dec. 13, 2016 | --- | $47.02 | --- | --- | 3.30% | $78.35 |
| NAVI | Navient Corp. | E | Aug. 31, 2016 | --- | $13.60 | --- | --- | 4.71% | $21.98 |
| PBCT | People's United Financial Inc. | D | June 20, 2016 | --- | $16.63 | --- | --- | 4.03% | $17.28 |
| RF | Regions Financial Corp. | E | June 27, 2016 | --- | $14.06 | --- | --- | 1.71% | $14.93 |
| SANM | Sanmina Corp. | E | Dec. 5, 2016 | --- | $35.20 | --- | --- | 0.00% | $36.05 |
| SENEA | Seneca Foods Corp. | E | Dec. 22, 2016 | --- | $28.90 | --- | --- | 0.00% | $69.20 |
| SIG | Signet Jewelers Ltd. | E | Jan. 9 | --- | $53.59 | --- | --- | 1.87% | $71.41 |
| SPOK | Spok Holdings Inc. | E | Feb. 9 | --- | $16.25 | --- | --- | 3.08% | $38.13 |
| STI | SunTrust Banks Inc. | E | April 11 | --- | $56.13 | --- | --- | 1.78% | $61.96 |
| STWD | Starwood Property Trust Inc. | E | April 11 | --- | $22.08 | --- | --- | 8.70% | $29.28 |
| SUP | Superior Industries International Inc. | E | March 7 | --- | $14.35 | --- | --- | 5.02% | $25.53 |
| SYF | Synchrony Financial | E | March 2 | --- | $30.07 | --- | --- | 0.86% | $34.07 |
| SYKE | Sykes Enterprises Inc. | E | March 20 | --- | $26.14 | --- | --- | 0.00% | $27.43 |
| TCF | TCF Financial Corp. | E | March 26 | --- | $14.93 | --- | --- | 2.01% | $18.02 |
| TRV | Travelers Companies Inc. | D | Dec. 1, 2016 | --- | $127.89 | --- | --- | 1.52% | $134.38 |
| TSE:CLS | Celestica Inc. | E | Jan. 11 | --- | $14.38 | --- | --- | 0.00% | $20.71 |
| TSE:CM | Canadian Imperial Bank of Commerce | E | Jan. 12 | --- | $106.94 | --- | --- | 4.44% | $114.08 |
| TSE:CWB | Canadian Western Bank | D | March 25 | --- | $28.00 | --- | --- | 3.29% | $36.05 |
| TSE:LNR | Linamar Corp. | E | March 26 | --- | $67.67 | --- | --- | 0.59% | $83.15 |
| TSE:TD | Toronto-Dominion Bank | D | April 11 | --- | $63.73 | --- | --- | 3.45% | $65.31 |
| URBN | Urban Outfitters Inc. | D | July 19, 2016 | --- | $19.27 | --- | --- | 0.00% | $20.09 |
Disclosure:Â The author held a long position in Starwood Property Trust (STWD, Financial) but did not hold a position in any other company mentioned in this article at the time of publication and had no specific intention of changing that position within the next 72 hours; however, the author does intend to make some trades in the next 72 hours and may select a company from this list. See my current holdings here. This article is not investment advice and all readers are encouraged to speak to a registered investment adviser prior to making any investing decisions. Please also read our full disclaimer. This article first appeared on ModernGraham.
