Author: Craig Adeyanju
Estimated read time: 3 minutes
Publication date: 4th Oct 2019 12:39 GMT+1
For value investors, seeking out stocks that are underpriced by the market is always of top priority. We screened for stocks trading around near their 50-week lows to search for some attractively priced stocks. The primary focus was to identify stocks with attractive Graham numbers.
Graham number is essentially a measure of a stock's fundamental value by factoring the underlying company's book value per share and earnings per share. Named after Benjamin Graham, the "father of value investing," the Graham number is the maximum price a conservative investor should pay for a stock. For example, if a stock currently trading at $15 apiece has a Graham number of 20, by translation, the stock in question is underpriced by at least $5. Here's an online calculator for Graham number
Of course, as with any other stock indicator, the Graham number doesn't tell the whole story of the company behind the stock. As often said in the market, cheap stocks are cheap for reason. However, when companies that have been around for several decades to centuries are beaten down and have attractive Graham numbers, it's a no brainer to dig deeper. Here are some of such companies.
Please note that stock price quotes and Graham number calculations were as of the close of market on Oct. 1.
With a Graham number of 10.45 and stock price of $8.9 per share, Ford Motor (NYSE: F) is underpriced by $1.55. This means that there is at least 17% in there, at least according to the Graham number. Given the ongoing trade dispute and the plateauing North American automotive market, and high competition in the auto market, it's hard to see much value in Ford stock at the moment. However, investors may want to consider the company's significant product improvements combined with attractive dividend yield (over 6.7%). The company ranked in the top five of the J.D. Power 2019 Initial Quality Study (IQS). The study accounts for the number of issues reported per 100 vehicles during the first three months of ownership. A lower number indicates higher quality. According to IQS 2019, this year was the first time since 2014 that there wasn't an industrywide improvement, but it was Ford's first time be in the top five. If the product improvements continue, Ford may fast become a darling for dealerships, which should generally help improve its financials.
Detroit based automaker General Motors (NYSE: GM) faces similar headwinds with Ford — the struggling North American auto market and tariff uncertainties. Also, the company has a negative free cash flow narrative against it. However, with a Graham number of 62.68 and a stock price of $36.11, GM stock looks significantly undervalued. Here are a few things to consider.
First, the company has started earning an income again following a brief stint of loss. Also, while the free cash flow data is negative at the moment, the trend of the company's measures of liquidity looks positive. First, GM's inventory turnover has improved by roughly 45% in the past three years and currently sits at 13.31. By comparison, Japanese automaker Toyota's (NYSE: TM) inventory turnover has worsened by 11.32% in the last three years and currently stands at 11.62. Ford's inventory turnover, currently at 12.93, has worsened by 19.72% over the same period. Honda (NYSE: HMC), another Japanese automaker, has seen its inventory turnover declined by nearly 6% in the last three years to 10.02 as of the time of writing.
Disclaimer: Craig Adeyanju is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.
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