Investing 101: Graham Undervalued Stocks With UBS Buy Ratings

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If you're unsure of whether or not a stock is worth purchasing, it might be helpful to have the backup of a large investment bank's analysts. It's their full-time job to analyze companies, so their word is as professional as it gets.

Furthermore, if the company is undervalued, it could imply that the stock has a large upside. When looking for undervalued companies, the Graham Number, one of Benjamin Graham's famous valuations, can be incredibly helpful.

The Graham Number is 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.

Business section: Investing ideas
Below is a screen using the information above. We wanted to have the "buy" ratings backing of a large investment bank, so we chose UBS.

With their ratings encouragement, we proceeded with the Graham Number.

Do you think UBS is right about these undervalued stocks?

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

1. BB&T (NYS: BBT) : Operates as the financial holding company for Branch Banking and Trust Company that provides banking and trust services to small and mid-size businesses, public agencies, local governments, and individuals in the United States. Market cap at $19.83B, most recent closing price at $28.39. On 12/16/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 2.12, and a MRQ book value per share value at 25.51, implies a Graham Number fair value = sqrt(22.5*2.12*25.51) = $34.88. Based on the stock's price at $28.35, this implies a potential upside of 23.04% from current levels.

2. Allstate (NYSE: ALL): Engages in the personal property and casualty insurance, life insurance, retirement, and investment products businesses primarily in the United States. Market cap at $16.75B, most recent closing price at $34.09. On 08/10/2011, UBS had a Buy rating on the stock. 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 $33.07, this implies a potential upside of 26.85% from current levels.

3. City National: Operates as the bank holding company for City National Bank that provides a range of banking, investing, and trust services to small to mid-sized businesses, entrepreneurs, professionals, and affluent individuals. Market cap at $2.51B, most recent closing price at $47.04. On 11/08/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 3.33, and a MRQ book value per share value at 41.77, implies a Graham Number fair value = sqrt(22.5*3.33*41.77) = $55.94. Based on the stock's price at $47.27, this implies a potential upside of 18.35% from current levels.

4. Dana Holding (NYS: DAN) : Engages in the design, manufacture, and supply of products for vehicle manufacturers worldwide. Market cap at $1.92B, most recent closing price at $13.0. On 11/22/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 1.4, and a MRQ book value per share value at 7.45, implies a Graham Number fair value = sqrt(22.5*1.4*7.45) = $15.32. Based on the stock's price at $12.61, this implies a potential upside of 21.48% from current levels.

5. FirstMerit (NAS: FMER) : Operates as the bank holding company for FirstMerit Bank, N. Market cap at $1.64B, most recent closing price at $14.95. On 11/08/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 1.12, and a MRQ book value per share value at 14.51, implies a Graham Number fair value = sqrt(22.5*1.12*14.51) = $19.12. Based on the stock's price at $15.12, this implies a potential upside of 26.47% from current levels.

6. JetBlue Airways (NAS: JBLU) : Provides passenger air transportation services in the United States. Market cap at $1.46B, most recent closing price at $5.14. On 05/31/2012, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 0.35, and a MRQ book value per share value at 6.36, implies a Graham Number fair value = sqrt(22.5*0.35*6.36) = $7.08. Based on the stock's price at $5.15, this implies a potential upside of 37.42% from current levels.

7. Umpqua Holdings: Operates as the bank holding company for Umpqua Bank that provides commercial and retail banking services to corporate, institutional, and individual customers primarily in the areas of Oregon, northern California, and Washington. Market cap at $1.37B, most recent closing price at $12.23. On 11/08/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 0.76, and a MRQ book value per share value at 15.08, implies a Graham Number fair value = sqrt(22.5*0.76*15.08) = $16.06. Based on the stock's price at $12.17, this implies a potential upside of 31.95% from current levels.

8. Wintrust Financial: Engages in community banking, specialty finance, and wealth management operations. Market cap at $1.2B, most recent closing price at $33.0. On 11/08/2011, UBS had a Buy rating on the stock. Diluted TTM earnings per share at 1.81, and a MRQ book value per share value at 41.65, implies a Graham Number fair value = sqrt(22.5*1.81*41.65) = $41.18. Based on the stock's price at $32.38, this implies a potential upside of 27.19% 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.

At the time this article was published The Motley Fool owns shares of FirstMerit. 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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