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April 8, 2011
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Fundamental analysis first and foremost, including market info and direction, the sector, the industry and then individual companies. Weekly stock screens followed by my charting: end-of-day and intraday, STX is undervalued based on Fair Valuations (FV) as well as its short term and 1 year targets.
In the many differing ways to calculate whether to buy (undervalued) or sell (overvalued) a stock, one needs a basis to determine FAIR VALUE (FV) of the stock or security.
The Graham number estimates the maximum price an investor should pay for a stock after a formula developed by Mr. Benjamin Graham. The formula calculates Fair Value using current Earnings per Share (EPS) (trailing twelve months or ttm) and book value (BV) per share.
Assumptions in the Graham number calculation:
(a) the P/E should be no greater than 15
(b) the price per book value should be no greater than 1.5
(c) the product of a and b should be no greater than 22.5
So, the Formula looks lke this:
FairValue (FV) = SQRT( 22.5 x BV x EPS )
SQRT = square root
Checking the FairValue using the Benjamin Graham calculation, Seagate Tech STX ( $13.49 ) has a BV of $6.23 and a Tangible Book Value per Share (TBVpS) of $6.13 with EPS (ttm) of $2.37.
The FairValue calculation, when I added STX (3/4/2011) as one of my picks, says Seagate Tech, at $12.44, has a FV of $18.23 and is undervalued by $5.79 or 46.54 percent.
Grinning, in about 1 month, my purchase of STX has just hit my short term target of $16.09, returning +30 percent ... AND ... STILL hasn't gotten to FAIR Value (FV) of $18.23 and or my long term targets.
Homework may seem dull, boring, and time consuming; but, ... after all it is OUR money ... and who'll take better care of our money than us? When we do our own HOMEWORK ... it's not I hope, or I think, or I want ... .... it's I KNOW! Homework renders Knowledge and Confidence ... and that's priceless!
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