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 65 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 oil and gas service company Baker Hughes (NYS: BHI) .
Who are they?
Baker Hughes was formed in 1987 with the merger of Baker International and Hughes Tool Company, which both trace their founding to the early 20th century. During its history, Baker Hughes has acquired many companies and has grown to encompass operations throughout much of the world, including operations on five continents.
This diverse footprint makes Baker Hughes an enticing play despite the current unrest in the Middle East. Furthermore, with U.S. land rigs in operation down 6% during the most recent quarter, it may be time to narrow in on oil and natural gas plays with multinational operations. This could be the reason why a large majority of members on CAPS have given Baker Hughes the coveted "green thumb" of outperformance.
What's it worth?
A recent sell-off in the market has pushed Baker Hughes further below its Graham number, and major competitor Haliburton (NYS: HAL) is now trading within 1% of its own Graham valuation.
Book Value Per Share (mrq)
Weatherford International (NYS: WFT)
National Oilwell Varco (NYS: NOV)
Tenaris S.A. (NYS: TS)
Source: Yahoo! Finance and author's calculations
Haliburton is well-known to even the most casual investors due to a famous former CEO, and the company is a recognized leader at what it does. Weatherford International, on the other hand, has been in the news for all the wrong reasons, including possible improper accounting and iffy behaviors in some other countries, as well as its decision to relocate to Switzerland, partially to help lower its tax bill.
National Oilwell Varco is a slightly different play in the oil and gas field, primarily focusing on providing major drillers with equipment and components used along the production pipeline, moving it closer to becoming "the perfect stock." Finally, Luxembourg-based Tenaris is hoping to continue its recent history of earnings growth, something that has helped push the price far above its current Graham valuation.
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 will also be adding Baker Hughes to My Watchlist to stay up to date on anything that may cause me to change my opinion of the company.
There are plenty of other energy options for your portfolio beyond the companies mentioned here. In fact, our analysts have identified "The One Energy Stock You Must Own Before 2014." To find out which one they identified, click hereto get a copy of the free report while it is still available.
The article Is This Oil and Gas Company Cheap According to Graham? originally appeared on Fool.com.
Robert Eberhard has no positions in the stocks mentioned above. Follow him on Twitter, or click here to see his holdings and a short bio. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company and National Oilwell Varco. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.