One popular approach to investing based on Benjamin Graham's methods is to use the "Graham number." There are some important differences between the Graham number and the Graham formula, but the former is definitely useful even if it is just being used as a screening tactic.
I've selected the best companies reviewed by ModernGraham which trade below their Graham number. The companies selected were all found suitable for the Defensive Investor or the Enterprising Investor, and have been valued as undervalued based on the ModernGraham valuation model. The full list can be found in the latest issue of the monthly Stocks & Screens report; however, to cut down on length, I've selected the 10 which trade furthest below their Graham number.
Defensive Investors are defined as investors who 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.
GameStop Corp. (GME, Financial)
GameStop 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 level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.03 in 2015 to an estimated $2.45 for 2019. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.3% annual earnings loss over the next seven to 10 years. As a result, the ModernGraham valuation model, based on Graham's value investing formula, returns an estimate of intrinsic value above the price.
At the time of valuation, further research into GameStop revealed the company was trading below its Graham number of $37.34. The company pays a dividend of $1.52 per share, for a yield of 10.5%, putting it among the best dividend-paying stocks today. Its PEmg (price over earnings per share) was 5.91, below the industry average of 37.1, 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 of $-2.68.
GameStop fares extremely well in the ModernGraham grading system, scoring an A-.Â
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 $3.86 in 2014 to an estimated $6.07 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.22% 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 Signet Jewelers revealed the company was trading below its Graham number of $61.99. The company pays a dividend of $1.04 per share, for a yield of 2.1%, putting it among the best dividend-paying stocks today. Its PEmg was 8.06, below the industry average of 30.22, 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 $-3.32.
Signet Jewelers fares extremely well in the ModernGraham grading system, scoring an A-.
Canfor Corp. (TSX:CFP, Financial)
Canfor 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 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 88 cents in 2014 to an estimated $2.18 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 2.34% 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 Canfor revealed the company was trading below its Graham number of $32.18. The company does not pay a dividend. Its PEmg was 13.17, below the industry average of 20.82, 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 -99 cents.
Canfor performs fairly well in the ModernGraham grading system, scoring a B+.
CNO Financial Group Inc. (CNO, Financial)
CNO Financial Group is suitable for the Enterprising Investor, but not the more conservative Defensive Investor. The Defensive Investor is concerned with 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 $1.01 in 2014 to an estimated $1.56 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 2.89% 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 CNO Financial Group revealed the company was trading below its Graham number of $36.61. The company pays a dividend of 35 cents per share, for a yield of 1.6%. Its PEmg was 14.28, below the industry average of 36.08, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
CNO Financial Group performs fairly well in the ModernGraham grading system, scoring a B+.
Bed Bath & Beyond Inc. (BBBY, Financial)
Bed Bath & Beyond is suitable for the Enterprising Investor, but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and 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 $4.19 in 2014 to an estimated $4.79 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 1.57% 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 Bed Bath & Beyond revealed the company was trading below its Graham number of $34.59. The company pays a dividend of 38 cents per share, for a yield of 1.7%. Its PEmg was 5.36, below the industry average of 35.42, 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 $-3.6.
Bed Bath & Beyond performs fairly well in the ModernGraham grading system, scoring a B+.
Prudential Financial Inc. (PRU, Financial)
Prudential Financial 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 $2.17 in 2014 to an estimated $12.54 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.45% 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 Prudential Financial revealed the company was trading below its Graham number of $185.87. The company pays a dividend of $3 per share, for a yield of 3.1%, putting it among the best dividend-paying stocks today. Its PEmg was 7.6, below the industry average of 30.02, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
Prudential Financial fares extremely well in the ModernGraham grading system, scoring an A-.
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 $3.32 in 2014 to an estimated $8.11 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.63% 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 Linamar revealed the company was trading below its Graham number of $99.21. The company pays a dividend of 48 cents per share, for a yield of 0.8%. Its PEmg was 7.25, below the industry average of 26.58, 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 $-18.85.
Linamar performs fairly well in the ModernGraham grading system, scoring a B+.
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 $4.25 in 2014 to an estimated $7.01 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.58% 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 Lincoln National revealed the company was trading below its Graham number of $117.31. The company pays a dividend of 87 cents per share, for a yield of 1.7%. Its PEmg was 7.33, below the industry average of 30.63, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
Lincoln National performs fairly well in the ModernGraham grading system, scoring a B+.
Unum Group 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 $2.71 in 2015 to an estimated $4.02 for 2019. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.17% 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 Unum Group revealed the company was trading below its Graham number of $68.83. The company pays a dividend of 98 cents per share, for a yield of 2.8%, putting it among the best dividend-paying stocks today. Its PEmg was 8.85, below the industry average of 32.96, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
Unum Group fares extremely well in the ModernGraham grading system, scoring an A.
Invesco 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 $1.89 in 2014 to an estimated $2.39 for 2018. This level of demonstrated earnings growth outpaces the market's implied estimate of 0.65% 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 Invesco revealed the company was trading below its Graham number of $33.89. The company pays a dividend of $1.15 per share, for a yield of 6.7%, putting it among the best dividend-paying stocks today. Its PEmg was 7.21, below the industry average of 18, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
Invesco fares extremely well in the ModernGraham grading system, scoring an A.
Disclosure: The author held a long position in IVZ, 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.
