Rallying Small Caps Undervalued According To Their Graham Number

By Kapitall | April 01, 2012 AAA

Written by Alexander Crawford



Do you follow value investors such as Warren Buffett? This type of investing involves searching for stocks that appear to be trading at a price below their fair value. Investors that are keen enough to spot these opportunities will benefit as the stock rises to converge with its fair value.

For ideas on how to start your own value investing screen, we began with small-cap stocks, with market caps between $300 and 500 million. We screened these names to find those rallying above their 20-day, 50-day and 200-day moving averages, indicating they have strong upward momentum.

Finally, we screened for those that appear undervalued relative to the Graham Number, a measure of a stock's maximum fair value created by the "Godfather of value investing," Benjamin Graham. The number is based off of a stock's EPS and book value per share (BVPS).

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.

Interactive Chart: Press Play to compare changes in market cap over the last two years for the stocks mentioned below.




Business Section: Investing Ideas

Below are the stocks that satisfied this value investing screen. These rallying small caps are trading at steep discounts to their Graham Number, which may indicate that they are being undervalued by the market.

Do you think they should be trading higher?

Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

1. Alamo Group Inc. (NYSE:ALG): Provides equipment and related replacement parts for maintenance and agriculture. Market cap at $353.13M. The stock is currently rallying 6.97% above its 20-day moving average, 5.63% above its 50-day MA, and 19.89% above its 200-day MA. Diluted TTM earnings per share at 2.68, and a MRQ book value per share value at 23.33, implies a Graham Number fair value = sqrt(22.5*2.68*23.33) = $37.51. Based on the stock's price at $29.83, this implies a potential upside of 25.74% from current levels.

2. Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI): Operates as a commercial real estate finance company in the United States. Market cap at $321.76M. The stock is currently rallying 2.22% above its 20-day moving average, 5.25% above its 50-day MA, and 13.39% above its 200-day MA. Diluted TTM earnings per share at 1.35, and a MRQ book value per share value at 16.39, implies a Graham Number fair value = sqrt(22.5*1.35*16.39) = $22.31. Based on the stock's price at $16.17, this implies a potential upside of 37.99% from current levels.

3. SeaCube Container Leasing Ltd. (NYSE:BOX): Operates as a container leasing company worldwide. Market cap at $350M. The stock is currently rallying 2.39% above its 20-day moving average, 6.37% above its 50-day MA, and 21.32% above its 200-day MA. Diluted TTM earnings per share at 1.96, and a MRQ book value per share value at 10.87, implies a Graham Number fair value = sqrt(22.5*1.96*10.87) = $21.89. Based on the stock's price at $17.67, this implies a potential upside of 23.91% from current levels.

4. Cardinal Financial Corp. (Nasdaq:CFNL): Operates as the holding company for Cardinal Bank that provides banking products and services to commercial and retail customers in Virginia and greater Washington, D. Market cap at $330.25M. The stock is currently rallying 1.53% above its 20-day moving average, 1.64% above its 50-day MA, and 7.97% above its 200-day MA. Diluted TTM earnings per share at 0.94, and a MRQ book value per share value at 8.83, implies a Graham Number fair value = sqrt(22.5*0.94*8.83) = $13.67. Based on the stock's price at $11.2, this implies a potential upside of 22.02% from current levels.

5. Great Southern Bancorp Inc. (Nasdaq:GSBC): Operates as the bank holding company for Great Southern Bank that offers various banking products and services in Missouri, Iowa, Kansas, Nebraska, and Arkansas. Market cap at $328.05M. The stock is currently rallying 5.01% above its 20-day moving average, 2.12% above its 50-day MA, and 19.44% above its 200-day MA. Diluted TTM earnings per share at 1.93, and a MRQ book value per share value at 19.78, implies a Graham Number fair value = sqrt(22.5*1.93*19.78) = $29.31. Based on the stock's price at $24.05, this implies a potential upside of 21.86% from current levels.

6. IXYS Corp. (Nasdaq:IXYS): Engages in the development, manufacture, and marketing of power semiconductors, advanced mixed signal integrated circuits (ICs), application specific integrated circuits (ASICs), and systems and radio frequency semiconductors. Market cap at $409.69M. The stock is currently rallying 7.40% above its 20-day moving average, 5.58% above its 50-day MA, and 6.45% above its 200-day MA. Diluted TTM earnings per share at 1.31, and a MRQ book value per share value at 7.89, implies a Graham Number fair value = sqrt(22.5*1.31*7.89) = $15.25. Based on the stock's price at $12.49, this implies a potential upside of 22.1% from current levels.

7. Renasant Corp. (Nasdaq:RNST): Provides financial and insurance services to retail and commercial customers. Market cap at $410.9M. The stock is currently rallying 3.14% above its 20-day moving average, 4.21% above its 50-day MA, and 13.61% above its 200-day MA. Diluted TTM earnings per share at 1.02, and a MRQ book value per share value at 19.44, implies a Graham Number fair value = sqrt(22.5*1.02*19.44) = $21.12. Based on the stock's price at $16.26, this implies a potential upside of 29.9% from current levels.

8. Southside Bancshares Inc. (Nasdaq:SBSI): Operates as the holding company for Southside Bank that provides financial products and services to individuals, businesses, municipal entities, and non-profit organizations. Market cap at $365.14M. The stock is currently rallying 1.29% above its 20-day moving average, 2.47% above its 50-day MA, and 9.56% above its 200-day MA. Diluted TTM earnings per share at 2.47, and a MRQ book value per share value at 15.9, implies a Graham Number fair value = sqrt(22.5*2.47*15.9) = $29.73. Based on the stock's price at $22.2, this implies a potential upside of 33.9% from current levels.

9. West Coast Bancorp (Nasdaq:WCBO): Operates as the holding company for West Coast Bank that provides various banking and financial products and services in western Oregon and southwestern Washington. Market cap at $375.77M. The stock is currently rallying 2.58% above its 20-day moving average, 9.60% above its 50-day MA, and 18.31% above its 200-day MA. Diluted TTM earnings per share at 1.58, and a MRQ book value per share value at 15.41, implies a Graham Number fair value = sqrt(22.5*1.58*15.41) = $23.41. Based on the stock's price at $19.05, this implies a potential upside of 22.86% from current levels.

10. WSFS Financial Corp. (Nasdaq:WSFS): Operates as the thrift holding company for the Wilmington Savings Fund Society, FSB, which provides various financial services primarily in the mid-Atlantic region of the United States. Market cap at $356.53M. The stock is currently rallying 7.28% above its 20-day moving average, 3.58% above its 50-day MA, and 9.69% above its 200-day MA. Diluted TTM earnings per share at 2.28, and a MRQ book value per share value at 45.19, implies a Graham Number fair value = sqrt(22.5*2.28*45.19) = $48.15. Based on the stock's price at $39.29, this implies a potential upside of 22.55% from current levels.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Disclosure: Kapitall's Alexander Crawford does not own any of the shares mentioned above. BVPS and EPS data sourced from Yahoo! Finance.

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