I recently spent some time dissecting Benjamin Graham's The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.
However, a quick check can help determine whether or not a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. With that in mind, I looked at the stocks of the S&P 500 that exceeded a P/B of 1.5 but still met the ideal situation mentioned above. I will be making a CAPScall on most of these companies after comparing them to competitors and their current value in relation to their Graham numbers. Up next is retail giant Best Buy (NYS: BBY) .
Who are they?
Best Buy is often viewed as "Amazon's (NAS: AMZN) Showroom," or the place that shoppers can get their hands on products and compare them before purchasing them from the usually cheaper online retailer. Even with price match guarantees and other similar programs, same-store sales were down in December during the height of the Christmas season. CEO Brian Dunn was taken to task for the company's failures in customer service, and his response to the criticism was mixed.
That's not to say the company isn't trying. It decided to forgo further expansion plans in Europe, instead deciding to focus on smaller-format stores, similar to the numerous Best Buy Mobile stores found throughout U.S. malls. It continues to look cheap, and it may actually be a value play under the right circumstances.
What's it worth?
Despite its issues, Best Buy is still cheap when compared to its Graham number, but has the smallest upside of its competitors:
Book Value Per Share (most recent quarter)
GameStop (NYS: GME)
RadioShack (NYS: RSH)
hhgregg (NYS: HGG)
Sources: Yahoo! Finance and author's calculations. TTM = trailing 12 months.
GameStop is trying to move beyond its physical store locations with the expansion of Impulse, its digital content provider. While it only has a 10% market share, the move to digital content is a step that Best Buy has yet to take. RadioShack is trying to make its way in the world of electronic retail by focusing on mobile devices, and it is currently generating enough cash to yield more than 7%. Finally, hhgregg offers a slightly expanded inventory, focusing more on appliances and televisions than Best Buy does, but it recently lowered guidance for the year, driving its price down over the past few weeks.
A stock's valuation, regardless of the method used, is but one thing to look at when evaluating a potential investment. In this instance, though the company appears cheaper when looking at its Graham number, many other factors cause me to think that the company will not approach this number and will instead start to retreat slightly over the next few years.
With that said, I am going to continue rating Best Buy a "thumbs down" over on my CAPS page in order to keep track of this call and hold myself accountable. I will continue to keep an eye on the company, and will pay special attention when it releases earnings at the end of the month. They should be a good indicator of whether or not the best days for the retailer are behind it.
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At the time thisarticle was published Fool contributor Robert Eberhard holds no position in any company mentioned. Click here to see his holdings and a short bio or follow him on Twitter. The Motley Fool owns shares of GameStop, Amazon.com, Best Buy, and RadioShack. Motley Fool newsletter services have recommended buying shares of Amazon.com and hhgregg, as well as writing covered calls on GameStop and Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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