Investing 101: Stocks Trading Near Highs Undervalued by Graham

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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 screened for stocks 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 on 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.

Finally, we searched among the potentially undervalued stocks for those nearing their 52-week high. This may seem contradictory -- these names seem on their way to closing the gap between market value and "fair value" -- but it's very possible they have more upside to price in.

Trading near a 52-week high indicates the firm has strong upward momentum. The fact that they still appear undervalued despite hitting new highs suggest ample opportunity to continue their rally.

Business section: Investing ideas
We decided to put together a list of stocks with these ideas in mind. We started with companies that are trading within 5% of their 52-week high, and then screened those names using the Graham Number.

Do you think these stocks will continue to push new highs?

List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)

1. The Chubb Corporation (NYS: CB) : Provides property and casualty insurance to businesses and individuals. Market cap at $19.46B, most recent closing price at $72.17. The stock is trading at 3.56% below its 52-week high. Diluted TTM earnings per share at 5.86, and a MRQ book value per share value at 57.38, implies a Graham Number fair value = sqrt(22.5*5.86*57.38) = $86.98. Based on the stock's price at $70.8, this implies a potential upside of 22.85% from current levels.

2. Allstate (NYS: ALL) : Engages in the personal property and casualty insurance, life insurance, retirement, and investment products businesses primarily in the United States. Market cap at $16.43B, most recent closing price at $33.60. The stock is trading at 4.06% below its 52-week high. Diluted TTM earnings per share at 2.01, and a MRQ book value per share value at 38.91, implies a Graham Number fair value = sqrt(22.5*2.01*38.91) = $41.95. Based on the stock's price at $32.75, this implies a potential upside of 28.09% from current levels.

3. CenterPoint Energy (NYS: CNP) : Operates as a public utility holding company in the United States. Market cap at $8.56B, most recent closing price at $20.13. The stock is trading at 3.06% below its 52-week high. Diluted TTM earnings per share at 3.16, and a MRQ book value per share value at 10.03, implies a Graham Number fair value = sqrt(22.5*3.16*10.03) = $26.70. Based on the stock's price at $19.62, this implies a potential upside of 36.11% from current levels.

4. W.R. Berkley (NYS: WRB) : Operates as commercial lines writers in the property casualty insurance business primarily in the United States. Market cap at $5.39B, most recent closing price at $39.04. The stock is trading at 1.50% below its 52-week high. Diluted TTM earnings per share at 2.87, and a MRQ book value per share value at 29.85, implies a Graham Number fair value = sqrt(22.5*2.87*29.85) = $43.90. Based on the stock's price at $37.83, this implies a potential upside of 16.06% from current levels.

5. BOK Financial (NAS: BOKF) : A financial holding company, offers a range of financial products and services to commercial and industrial customers, and other financial institutions and consumers. Market cap at $3.87B, most recent closing price at $56.59. The stock is trading at 3.93% below its 52-week high. Diluted TTM earnings per share at 4.45, and a MRQ book value per share value at 41.61, implies a Graham Number fair value = sqrt(22.5*4.45*41.61) = $64.55. Based on the stock's price at $55.54, this implies a potential upside of 16.22% from current levels.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Danny Guttridge does not own any of the shares mentioned above. EPS and BVPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

At the time this article was published The Motley Fool owns shares of W.R. Berkley. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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