Warren Buffett obviously has an innate talent for finding investment opportunities. However, that talent is also, at least partly, a product of his education. Buffett completed his graduate degree at the Colombia Business School which he specifically chose so he could study under Ben Graham.
Graham wrote the original textbook on investment selection with David Dodd. That book, Security Analysis, is still considered to be required reading by many market analysts. Graham also wrote The Intelligent Investor, a more accessible book designed for individual investors.
Graham believed that a company’s financial statement held the key to success. He advocated looking at the income statement and balance sheet to find stocks that offered value.
The Graham Number
In particular, Graham looked for stocks with a low price to earnings (P/E) ratio and a low price to book (P/B) value. He also explained a technique to combine these two metrics into a single number, the Graham Number.
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The Graham Number is a geometric average of the P/E ratio and P/B ratio. The geometric average of two numbers is the square root of the product of the two numbers. Graham advised investors to look for value and defined value as a P/E ratio of less than 15 and a P/B ratio of less than 1.5.
The Graham Number combines those two values into a single data point. It is thus the square root of 22.5 times the P/E ratio times the P/B ratio. When divided by the current market price, ratios below 1.0 indicate value.
Now, we know from news stories that Buffett recently bought billions of dollars worth of Apple (Nasdaq: AAPL). The stock had a Graham Number of 0.48, indicating it offered value at the time of Buffett’s buying.
Of course, one example does not prove the value of the Graham Number but it provides some degree of confidence in the technique. This week we screened for stocks trading below $10 a share with a Graham Number below 1.
Six Stocks Meet Our Strict Requirements
Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment strategies but any individual stock in the list could be a winner or loser.
Alliance Creative Group, Inc. (Other OTC: ACGX)
ACGX operates as a creative packaging and digital engagement company.
It provides creative and design services, including advertising campaigns, art direction, brand identity, logo and graphic design, strategy and planning, package design, Website design, collateral design, and photography; and club packs, corrugate, flexible, folding carton, pallet display, pre-print, custom, stock, and thermo-forming packaging services.
The company also offers supply chain management services, such as third-party logistics, trucking and distribution, vendor managed inventory, and warehousing along with online marketing; digital engagement; customer engagement; business consulting and strategic marketing; content creation.
Alliance Creative Group, Inc. offers its services under the St. Louis Packaging, STL Graphics, Snap Graphics, Print4aCause, CoporateGifts4aCause, and PeopleVine brand names.
The stock is trading with a P/E ratio of about 9 and a P/B ratio of 0.7. Both of these are well below the industry averages of 25 and 3, respectively.
Bridgepoint Education, Inc. (NYSE: BPI)
BPI provides postsecondary education services in the United States through online and campus facilities. Its academic institutions, Ashford University and University of the Rockies, offer associate’s, bachelor’s, master’s, and doctoral degree programs in the disciplines of business, education, psychology, social sciences, and health sciences.
The company recently offered approximately 1,200 courses and 80 degree programs. Among its various programs, BPI had 45,730 students enrolled.
The stock is volatile, often driven by news related to the for profit education industry. It is near lows that may not be justified based on fundamentals.
Analysts expect the company to report earnings per share of $0.38 this year, $0.49 next year and $0.74 in 2020. Looking ahead, the stock’s earnings would justify prices well above the current level.
Command Center, Inc. (Other OTC: CCNI)
CCNI is a staffing company that operates primarily in the manual on-demand labor segment of the staffing industry. It provides services primarily in the areas of light industrial, auto and transportation, and event services.
The company serves small to mid-sized businesses in the retail, construction, warehousing, industrial / manufacturing, transportation, and hospitality industries. It recently reported that it owned and operated 67 branches in 23 states.
With a P/E ratio of 14.3 and a P/B ratio of 1.46, CCNI is slightly below Graham’s value requirements.
The LGL Group, Inc. (NYSE: LGL)
LGL engages in the design, manufacture, and marketing of standard and custom-engineered electronic components in the United States and internationally.
Its Electronic Components segment offers packaged quartz crystals, oscillator modules, electronic filters, and integrated modules that are used primarily to control the frequency or timing of signals in electronic circuits.
This segment’s products are used in infrastructure equipment for the telecommunications and network equipment industries, as well as in electronic systems for applications in defense, aerospace, earth-orbiting satellites, down-hole drilling, medical devices, instrumentation, industrial devices, and global positioning systems.
The Electronic Instruments segment designs and manufactures frequency and time reference standards, distribution amplifiers, redundancy auto switches, and NTP servers for timing and synchronization in various applications.
Its products are used in computer networking, satellite earth stations, electric utilities, and broadcasting and telecommunication systems.
The stock price has been in an uptrend for some time and the fundamentals show that further gains are possible. The P/E ratio of 8.4 and P/B ratio of 0.8 are both below industry averages.
PCTEL, Inc. (Nasdaq: PCTI)
PCTI delivers performance critical telecom solutions in the Asia Pacific, Europe, the Middle East, Africa, and the Americas.
The Connected Solutions segment designs and delivers precision antennas, which are used primarily in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the Industrial Internet of Things.
The RF Solutions segment provides test tools that enhance the performance of wireless networks.
The company serves public and private carriers, wireless infrastructure providers, wireless equipment distributors, and value added resellers, as well as original equipment manufacturer providers.
The stock is pulling back within an up trend. Analysts expect earnings of $0.41 per share next year. At an industry average P/E ratio of 23.8, the stock could deliver a gain of more than 30%.
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