10 Stocks Trading Below Their Graham Number

Great companies that fit criteria based on Benjamin Graham's methods

Author's Avatar
Dec 19, 2016
Article's Main Image

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 trading below their Graham Number. The companies selected all are found suitable for the Defensive Investor and/or the Enterprising Investor and have been valued as undervalued based on the ModernGraham valuation model. Further, the overall screen found 22 companies meeting these criteria. The full list can be found near the end of this article; however, to cut down on length, I have selected the 10 which trade 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 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.

Aspen Insurance Holdings Ltd. (AHL, Financial)

Aspen Insurance Holdings Ltd. 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. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.19 in 2012 to an estimated $4.51 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.7% 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.

At the time of valuation, further research into Aspen Insurance Holdings Ltd. revealed the company was trading below its Graham Number of $82.44. The company pays a dividend of 86 cents per share for a yield of 1.6%. Its PEmg (price over earnings per share) was 11.91, below the industry average of 16.56, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)

02May2017141706.png

MetLife Inc. (MET, Financial)

MetLife Inc. 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 a valuation, the company appears to be undervalued after growing its EPSmg from $2.37 in 2012 to an estimated $4.04 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 2.75% 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 MetLife Inc. revealed the company was trading below its Graham Number of $78.35. The company pays a dividend of $1.55 per share for a yield of 2.7%, putting it among the best dividend paying stocks today. Its PEmg was 14.01, below the industry average of 16.56, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)

02May2017141707.png

Citigroup Inc. (C, Financial)

Citigroup Inc. 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 a 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)

02May2017141707.png

Equity Residential (EQR, Financial)

Equity Residential qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg from $2.15 in 2012 to an estimated $5.79 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.39% 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 Equity Residential revealed the company was trading below its Graham Number of $90.07. The company pays a dividend of $2.11 per share for a yield of 3.2%, putting it among the best dividend paying stocks today. Its PEmg was 11.29, below the industry average of 34.03, 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 $-24.85. (See the full valuation)

02May2017141708.png

Capital One Financial Corp. (COF, Financial)

Capital One Financial Corp. 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 a valuation, the company appears to be undervalued after growing its EPSmg 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 valuation model returns an estimate of intrinsic value above the price. (See the full valuation)

02May2017141708.png

Navient Corp. (NAVI, Financial)

Navient Corp. 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 a valuation, the company appears to be undervalued after growing its EPSmg  from 63 cents in 2012 to an estimated $2.39 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.25% annual earnings loss 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 Navient Corp. revealed the company was trading below its Graham Number of $21.98. The company pays a dividend of 64 cents per share for a yield of 4.5%, putting it among the best dividend paying stocks today. Its PEmg was 6.01, below the industry average of 19.87, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)

02May2017141709.png

Lincoln National Corp. (LNC, Financial)

Lincoln National Corp. 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 a 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)

02May2017141709.png

Baxter International Inc. (BAX, Financial)

Baxter International Inc. qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has no initial concerns. As a result, all value investors should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg from $3.6 in 2012 to an estimated $5.21 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.38% 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 Baxter International Inc. revealed the company was trading below its Graham Number of $56.99. The company pays a dividend of 48 cents per share for a yield of 1%. Its PEmg was 9.25, below the industry average of 40.07, 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 $-1.18. (See the full valuation)

02May2017141710.png

Aflac Inc. (AFL, Financial)

Aflac Inc. 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 a valuation, the company appears to be undervalued after growing its EPSmg  from $4.72 in 2012 to an estimated $6.27 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.58% 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 Aflac Inc. revealed the company was trading below its Graham Number of $87.87. The company pays a dividend of $1.62 per share for a yield of 2.2%, putting it among the best dividend paying stocks today. Its PEmg was 11.66, below the industry average of 16.56, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)

02May2017141710.png

Starwood Property Trust Inc. (STWD, Financial)

Starwood Property Trust Inc. 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 a valuation, the company appears to be undervalued after growing its EPSmg from $1.17 in 2012 to an estimated $1.98 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.4% 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 Starwood Property Trust Inc. revealed the company was trading below its Graham Number of $27.64. The company pays a dividend of $1.92 per share for a yield of 8.6%, putting it among the best dividend paying stocks today. Its PEmg was 11.3, below the industry average of 34.03, which by some methods of valuation makes it one of the most undervalued stocks in its industry. (See the full valuation)

02May2017141710.png

The full list

Clicking on the company name will take you to the company's latest valuation by ModernGraham.

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
AFL AFLAC Inc. D 8/7/2016 --- $69.41 --- --- 2.33%
AHL Aspen Insurance Holdings Ltd. E 12/13/2016 --- $53.40 --- --- 1.61%
AIG American International Group Inc. E 8/25/2016 --- $66.30 --- --- 1.81%
ARW Arrow Electronics Inc. E 7/3/2016 --- $71.78 --- --- 0.00%
BAC Bank of America Corp. E 7/14/2016 --- $22.66 --- --- 0.88%
BAX Baxter International Inc. D 8/16/2016 --- $44.72 --- --- 1.07%
C Citigroup Inc. E 7/19/2016 --- $59.75 --- --- 0.33%
COF Capital One Financial Corp. E 7/6/2016 --- $89.67 --- --- 1.78%
DHI D.R. Horton Inc. E 8/14/2016 --- $28.04 --- --- 1.07%
EQR Equity Residential D 8/21/2016 --- $64.05 --- --- 3.29%
LEN Lennar Corp. E 11/19/2016 --- $43.42 --- --- 0.37%
LNC Lincoln National Corp. E 5/20/2016 --- $66.39 --- --- 1.66%
MET MetLife Inc. E 12/13/2016 --- $54.37 --- --- 2.85%
MNST Monster Beverage Corp. E 7/27/2016 --- $44.50 --- --- 0.00%
NAVI Navient Corp. E 8/31/2016 --- $16.37 --- --- 3.91%
PHM PulteGroup Inc. E 7/18/2016 --- $18.83 --- --- 1.81%
PVH PVH Corp. D 8/14/2016 --- $91.98 --- --- 0.16%
RF Regions Financial Corp. E 6/27/2016 --- $14.20 --- --- 1.69%
SANM Sanmina Corp. E 12/5/2016 --- $35.95 --- --- 0.00%
STI SunTrust Banks Inc. E 8/25/2016 --- $55.27 --- --- 1.74%
STWD Starwood Property Trust Inc. E 8/25/2016 --- $21.90 --- --- 8.77%
TRV Travelers Companies Inc. D 12/1/2016 --- $121.60 --- --- 1.60%

Disclosure:Â The author held a long position in Starwood Property Trust 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.Â

Start a free 7-day trial of Premium Membership to GuruFocus.