A Trio of Stocks Trading Below Graham Blended Multiplier
During screening, if you choose stocks that have a fair market valuation, you will have a higher likelihood to pick value, but how can you determine whether a stock is fairly valued or not?
The pioneer of value investing, Benjamin Graham, suggested comparing the result of the stock's price-earnings ratio by its price-book ratio. This is called the Graham blended multiplier. If the result of the Graham blended multiplier is below 22.5, the stock may be undervalued by the market, drawing interest from investors for an eventual acquisition.
To test this theory, here are some outcomes of my screening of US-listed stocks with market capitalizations above $5 billion.
Reinsurance Group of America
The first company is Reinsurance Group of America, Incorporated (NYSE:RGA). Shares of the Chesterfield, Missouri-based reinsurance company closed at $154.52 on Monday for a market capitalization of $9.7 billion.
The stock has a Graham blended multiplier of 11.65, resulting from a price-earnings ratio of 12.66 multiplied by a price-book ratio of 0.92. The insurance - reinsurance industry has a median of 14.97 for the price-earnings ratio and of 1.12 for the price-book ratio.
Reinsurance Group of America's price-earnings ratio beats 58.82% of competitors operating in the insurance - reinsurance industry and its price-book ratio tops 55.56% of competitors in the industry.
Wall Street issued an overweight recommendation rating with an average target price of $158.33 for shares of Reinsurance Group of America.
Over the past 52 weeks through Oct. 7, the share price has risen 6% to above the 200-, 100- and 50-day simple moving average lines.
The 52-week range is $127.84 to $163.46.
The dividend yield is 1.62% versus the industry median of 2.79% as of Oct. 7. The company is currently paying a 70 cents cash quarterly dividend per common share. Reinsurance Group of America has paid dividends since Feb. 27, 2006.
The 14-day relative strength index of 45 suggests the stock is neither overbought nor oversold.
Credit Suisse Group AG
The second company is Credit Suisse Group AG (NYSE:CS). The stock of the Swiss global bank traded at $11.48 per share at close on Monday for a market capitalization of $28.9 billion.
The stock has a Graham blended multiplier of 8.60. The result derives from a price-earnings ratio of 12.64 multiplied by a price-book ratio of 0.68. The banks industry has a median of 11.39 for the price-earnings ratio and a median of 0.68 for the price-book ratio.
Credit Suisse Group AG tops 516 out of 1,316 companies operating in the banks industry in terms of better price-earnings ratio and beats 1,024 out of 1,405 companies in the industry in terms of better price-book ratio.
In the past year through Oct. 7, the share price has fallen 19% to below the 200-, 100- and 50-day simple moving average lines.
The 52-week range is $10.23 to $14.71.
The 14-day relative strength index of 33 indicates the stock is not far from oversold levels.
Knight-Swift Transportation Holdings Inc.
The third company is Knight-Swift Transportation Holdings Inc. (NYSE:KNX). Shares of the Phoenix, Arizona-based provider of truckload transportation services in North America and Mexico closed at $34.99 on Monday for a market capitalization of $5.97 billion.
The stock has a Graham blended multiplier of 15.55. The value results from a price-earnings ratio of 14.4 and a price-book ratio of 1.08. The transportation and logistics industry has a median of 15.1 for the price-earnings ratio and of 1.06 for the price-book ratio.
Knight-Swift Transportation Holdings' price-earnings ratio is ranked higher than 324 out of 614 companies operating in the transportation and logistics industry and its price-book ratio is ranked higher than 414 out of 796 companies.
Wall Street issued an overweight recommendation rating for shares of Knight-Swift Transportation Holdings with an average target price of $42.12.
Over the past 52 weeks through Oct. 7 the share price has gained 9% to close above the 200-, 100- and 50-day simple moving average lines.
The 52-week range is $23.27 to $39.26.
The dividend yield is 0.7% versus the industry median of 2.57% as of Oct. 7.
The company is currently paying a cash quarterly dividend of 6 cents per common share. Knight-Swift Transportation Holdings Inc. has paid dividends since Dec. 20, 2004.
The 14-day relative strength index of 48 suggests the stock is neither overbought nor oversold.
Disclosure: I have no positions in any securities mentioned.
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This article first appeared on GuruFocus.
