5 Mega-Cap Stocks Undervalued By The Graham Number

Do you consider yourself a value investor? If so here are some ideas on how to search for potentially undervalued stocks.

We ran a screen on the 200 largest US companies by market cap for those that appear undervalued relative to the Graham Number. The Graham Number was created by the "godfather of value investing" Benjamin Graham as a calculation for a stock's maximum fair value. It is based off of a stock's EPS and book value per share (BVPS).

Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)

The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.

?Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.?

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We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

Do you think these stocks should be trading higher? Use this list as a starting point for your own analysis.

1. Chevron Corp. (CVX): Engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. Market cap at $215.90B. Diluted TTM earnings per share at 13.44, and a MRQ book value per share value at 60.7, implies a Graham Number fair value = sqrt(22.5*13.44*60.7) = $135.48. Based on the stock's price at $106.66, this implies a potential upside of 27.02% from current levels.

2. Wells Fargo & Company (WFC): Provides retail, commercial, and corporate banking services primarily in the United States. Market cap at $163.27B. Diluted TTM earnings per share at 2.82, and a MRQ book value per share value at 24.65, implies a Graham Number fair value = sqrt(22.5*2.82*24.65) = $39.55. Based on the stock's price at $31.09, this implies a potential upside of 27.2% from current levels.

3. ConocoPhillips (COP): Operates as an integrated energy company worldwide. Market cap at $98.03B. Diluted TTM earnings per share at 8.97, and a MRQ book value per share value at 49.56, implies a Graham Number fair value = sqrt(22.5*8.97*49.56) = $100.01. Based on the stock's price at $73.36, this implies a potential upside of 36.33% from current levels.

4. Hewlett-Packard Company (HPQ): Offers various products, technologies, software, solutions, and services to individual consumers and small- and medium-sized businesses, as well as to the government, health, and education sectors worldwide. Market cap at $58.00B. Diluted TTM earnings per share at 3.32, and a MRQ book value per share value at 19.41, implies a Graham Number fair value = sqrt(22.5*3.32*19.41) = $38.08. Based on the stock's price at $29.59, this implies a potential upside of 28.69% from current levels.

5. Apache Corp. (APA): Operates as an independent energy company. Market cap at $42.23B. Diluted TTM earnings per share at 11.47, and a MRQ book value per share value at 69.46, implies a Graham Number fair value = sqrt(22.5*11.47*69.46) = $133.89. Based on the stock's price at $109.45, this implies a potential upside of 22.33% from current levels.

*BVPS and EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.