Earlier this year, I 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 met the ideal situation mentioned above. Currently, there are 68 companies in the index that meet these criteria. I will be making a CAPScall on these companies after comparing them to competitors and their current value in relation to their Graham numbers. Up next is regional bank BB&T (NYS: BBT) .
Who are they?
BB&T, based in North Carolina, is the 16th largest bank based on total assets, checking in with over $178 billion. Fellow Fool John Maxfield views it favorably, citing both its growing profitability and its above average dividend yield of 2.5%. Its dividend was boosted by 25% earlier this year after the bank successfully passed the required Fed stress tests, and it possesses some of the qualities that a certain Oracle of Omaha often looks at when valuing stocks.
What's it worth?
That said, there are currently two similarly sized banks that have more upside, but BB&T still has a bit of upside leading to its Graham valuation:
Book Value Per Share (mrq)
Fifth Third Bancorp (NAS: FITB)
New York Community Bancorp (NYS: NYB)
M&T Bank (NYS: MTB)
US Bancorp (NYS: USB)
Source: Yahoo! Finance and author's calculations.
Fifth Third followed the lead of some other regional banks in increasing its commercial loan portfolio, and still has plenty of room to grow -- and a "buy" rating to boot. New York Community Bank is a favorite of many investors and currently sports a dividend yield north of 7%, giving even more reason to give it some consideration.
M&T Bank was in the news recently for buying Hudson City Bancorp at a substantial premium, expanding its footprint from Connecticut to Virginia, a pretty wealth-laden territory. Finally, U.S Bancorp, despite trading at a premium to its Graham valuation, currently boasts an investment portfolio that lacks some of the riskiest investments, placing it in high esteem among some of the largest U.S. banks.
A stock's valuation, regardless of the method used, is but one thing to look at when evaluating a potential investment. With room to grow into its Graham number valuation, I will be placing a "thumbs up" over on my CAPS page in order to track this call and keep myself accountable. I'll also be adding BB&T to My Watchlist to stay up to date on anything that may cause me to change my opinion of the company.
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The article According to Graham, Is This Bank Cheap? originally appeared on Fool.com.
Fool contributor Robert Eberhard holds no position in any company mentioned. Follow him on Twitter, or click here to see his holdings and a short bio. The Motley Fool owns shares of Fifth Third Bancorp. 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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