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 to be 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 33 companies meeting these criteria (out of over 850 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 stocks may be a great investment if they prove to be suitable for your portfolio after your own additional research.
Navient Corp. (NAVI, Financial)
Navient 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 undervalued after growing its EPSmg (normalized earnings) 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 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 Navient 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 (price over earnings per share) 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)
Linamar Corp. (TSX:LNR, Financial)
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 net current asset value (NCAV) of $-7.49. (See the full valuation)
KB Home is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size and 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 valuation, the company appears to be undervalued after growing its EPSmg from -72 cents in 2013 to an estimated $2.2 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.52% 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 KB Home revealed the company was trading below its Graham Number of $25.21. The company pays a dividend of 10 cents per share for a yield of 0.6%. Its PEmg was 7.47, below the industry average of 28.49, 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 $8.5. (See the full valuation)
Aspen Insurance Holdings Ltd. (AHL, Financial)
Aspen Insurance Holdings 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 valuation, the company appears to be undervalued after growing its EPSmg 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 valuation model returns an estimate of intrinsic value above the price.
At the time of valuation, further research into Aspen Insurance Holdings 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 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)
LGI Homes Inc. (LGIH, Financial)
LGI Homes is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability 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 39 cents in 2013 to an estimated $2.76 for 2017. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.6% 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 LGI Homes revealed the company was trading below its Graham Number of $36.13. The company does not pay a dividend. Its PEmg was 11.7, below the industry average of 28.49, 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 $15.24. (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)
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)
Spok Holdings Inc. (SPOK, Financial)
Spok Holdings is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, 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 $2.08 in 2012 to an estimated $2.83 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.96% 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 Spok Holdings revealed the company was trading below its Graham Number of $38.13. The company pays a dividend of 50 cents per share for a yield of 2.7%, putting it among the best dividend-paying stocks today. Its PEmg was 6.58, below the industry average of 68.5, 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 $4.56. (See the full valuation)
Fifth Third Bancorp (FITB, Financial)
Fifth Third Bancorp 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 valuation, the company appears to be undervalued after growing its EPSmg from 82 cents in 2012 to an estimated $1.74 for 2016. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.75% 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. (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)
The full list
To view the MG Value and PEmg information, you must be logged in as a premium member. 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 | --- | $71.84 | --- | --- | 2.28% | $87.98 |
| AHL | Aspen Insurance Holdings Ltd. | E | Dec. 13, 2016 | --- | $52.10 | --- | --- | 1.65% | $82.44 |
| ARW | Arrow Electronics Inc. | E | July 3, 2016 | --- | $72.75 | --- | --- | 0.00% | $81.27 |
| BAC | Bank of America Corp. | E | July 14, 2016 | --- | $23.03 | --- | --- | 0.87% | $23.92 |
| BAX | Baxter International Inc. | D | Jan. 28 | --- | $51.83 | --- | --- | 0.95% | $56.96 |
| BBBY | Bed Bath & Beyond Inc. | D | June 14, 2016 | --- | $38.32 | --- | --- | 0.00% | $41.96 |
| BK | Bank of New York Mellon Corp. | E | Jan. 7 | --- | $46.25 | --- | --- | 1.51% | $48.91 |
| C | Citigroup Inc. | E | July 19, 2016 | --- | $58.33 | --- | --- | 0.34% | $85.07 |
| CNO | CNO Financial Group Inc. | E | Jan. 28 | --- | $20.21 | --- | --- | 1.48% | $24.73 |
| COF | Capital One Financial Corp. | E | July 6, 2016 | --- | $82.13 | --- | --- | 1.95% | $122.14 |
| CVG | Convergys Corp. | E | March 18 | --- | $20.71 | --- | --- | 1.69% | $23.70 |
| FITB | Fifth Third Bancorp | E | July 2, 2016 | --- | $24.73 | --- | --- | 2.10% | $25.45 |
| IVZ | Invesco Ltd. | D | July 24, 2016 | --- | $30.00 | --- | --- | 3.60% | $30.20 |
| JNS | Janus Capital Group Inc. | E | Feb. 2 | --- | $12.66 | --- | --- | 3.32% | $13.50 |
| KBH | KB Home | E | Feb. 4 | --- | $19.36 | --- | --- | 0.52% | $25.21 |
| KELYA | Kelly Services Inc. | E | Feb. 7 | --- | $21.26 | --- | --- | 1.32% | $30.13 |
| LGIH | LGI Homes Inc. | E | March 11 | --- | $32.56 | --- | --- | 0.00% | $36.13 |
| LNC | Lincoln National Corp. | E | May 20, 2016 | --- | $63.47 | --- | --- | 1.73% | $89.07 |
| MET | MetLife Inc. | E | Dec. 13, 2016 | --- | $51.69 | --- | --- | 3.00% | $78.35 |
| NAVI | Navient Corp. | E | Aug. 31, 2016 | --- | $14.00 | --- | --- | 4.57% | $21.98 |
| RF | Regions Financial Corp. | E | June 27, 2016 | --- | $14.08 | --- | --- | 1.70% | $14.93 |
| SENEA | Seneca Foods Corp. | E | Dec. 22, 2016 | --- | $35.05 | --- | --- | 0.00% | $69.20 |
| SIG | Signet Jewelers Ltd. | E | Jan. 9 | --- | $69.66 | --- | --- | 1.44% | $71.41 |
| SPOK | Spok Holdings Inc. | E | Feb. 9 | --- | $18.75 | --- | --- | 2.67% | $38.13 |
| STBA | S & T Bancorp Inc. | E | Feb. 23 | --- | $33.54 | --- | --- | 2.30% | $34.16 |
| STI | SunTrust Banks Inc. | E | Aug. 25, 2016 | --- | $54.34 | --- | --- | 1.77% | $59.54 |
| STWD | Starwood Property Trust Inc. | E | Aug. 25, 2016 | --- | $22.87 | --- | --- | 8.40% | $27.64 |
| SYF | Synchrony Financial | E | March 2 | --- | $32.74 | --- | --- | 0.79% | $34.07 |
| TCB | TCF Financial Corp. | E | March 26 | --- | $15.83 | --- | --- | 1.90% | $18.02 |
| TRV | Travelers Companies Inc. | D | Dec. 1, 2016 | --- | $121.01 | --- | --- | 1.61% | $134.38 |
| TSX:CLS | Celestica Inc. | E | Jan. 11 | --- | $18.98 | --- | --- | 0.00% | $20.71 |
| TSX:CWB | Canadian Western Bank | D | March 25 | --- | $28.99 | --- | --- | 3.17% | $36.05 |
| TSX:LNR | Linamar Corp. | E | March 26 | --- | $61.10 | --- | --- | 0.65% | $83.15 |
Disclosure:Â The author held a long position in Invesco Ltd. (IVZ) and Starwood Property Trust (STWD), 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.
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