In 1994, UNESCO designated Oct 5 as the World Teachers’ Day to underline the achievements of teachers and their contribution towards development of an educated and sensitive society. Today is the 21st anniversary of this day that honors teachers for being the founding pillars of formal education and the source of inspiration for countless lives. The day is observed by holding conferences and campaigns to highlight the contributions of the teaching profession and is celebrated across the world.

Teacher: A Friend, Philosopher & Guide

“Those who educate children well are more to be honored than they who produce them; for these only gave them life, those the art of living well.” – This line by the legendary Greek philosopher Aristotle superiorly defines the importance of a teacher in shaping a future generation. They lay the foundation of a formal education in an individual. Besides academic training, the world’s greatest teachers have enlightened his pupils by guiding them to the path of righteousness and contributing to the society at large.

If Albert Einstein taught how to overcome the setbacks of life winningly, Sir Issac Newton demonstrated how a universal event can lead to the discovery of a lifetime. Also, while Mohandas Gandhi showed the path of non-violence, Nelson Mandela taught how to transform the life of people around us with magnificent leadership skills.

The Father of Investors

In the domain of the stock market, an investor can tread on the footsteps of the most successful investors like Warren E. Buffett and Carl Icahn, among others, and follow their investing ideas to understand the tricks of the game. However, an investor cannot solely rely on such principles, as these can’t be applied in every scenario.

A no-brainer, blindfold trail can lead to a giant collapse and a check on the wind direction is needed. As said by the Benjamin Graham, “The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate”.

With the stock market still volatile, it’s the best time to pick the potentially undervalued stocks as they hold much promise instead of focusing on the creamy layer. There are several valuation metrics/methods to do that, with ‘Graham Number’ being one of these. Named after the “Father of Value Investing” Benjamin Graham, it can help determine whether a company might be worth a look, before the market realizes how good a deal it is.

Hence, on World Teachers’ Day let’s learn from the “Father of Value Investing” itself, who has been the proud mentor to the likes of Warren E. Buffet, William J. Ruane, Irving Kahn and Walter J. Schloss.

What Is the Graham Number?

Graham Number takes into account earnings per share and book value per share to measure a stock's maximum fair market value. In other words, it is the upper end of the price range that a protective investor should pay for the stock. Theoretically, any stock trading below its Graham Number is considered undervalued.

The Underlying formula is:

The Graham Number = Square Root of (22.5) x (TTM EPS) x (MRQ Book Value per Share).

The 22.5 is included in the formula as a rule of thumb to account for Graham's assumption that the price-to-earnings ratio should not be over 15 and the price to book ratio should not be over 1.5 for an undervalued stock. So, the figure is generated as: (P/E of 15) x (P/B of 1.5) = 22.5.

However, an important point to be noted is that though the calculation is quick and easier, it does not consider many fundamental characteristics and ratios, which are also important to identify promising undervalued stocks. So an investor is advised to combine the Graham Number mantra with other fair market value calculations before making an investment decision, depending on the investment strategy.

It is also important to try and determine the reason for the undervaluation. Hence, though this is a not a ‘foolproof’ strategy, it can act as an easy starting point.

4 Stocks to Pay Tribute to Benjamin Graham

Coupling the fundamentals of Graham Number with our quantitative model ‘Zacks Rank’, several value stocks can be derived that are prized assets for your portfolio. Notably, a stock carrying a Zacks Rank #1 (Strong Buy) or #2 (Buy), can offer above-average returns. Of this stock pool, we believe the following 4 stocks from diverse industries are worth considering.

Atlas Air Worldwide Holdings, Inc. AAWW – Zacks Rank #2 – Headquartered in Purchase, NY, the company operates the world's largest fleet of Boeing freighter aircraft via its two chief subsidiaries, Atlas Air and Polar Air Cargo. It holds a market capitalization of $901.41 million (as of Oct 2, 2015).

•    Earnings Per Share (‘TTM’) = $4.84
•    Book Value per Share (as of June 30, 2015) = $57.86
•    Graham Number = SQRT (22.5 x 4.84 x 57.86) = $79.38

The stock is currently trading at $35.98 (closing price on Oct 2, 2015), implying a discount of 54.7% from the Graham Number.

JA Solar Holdings Co., Ltd. JASO – Zacks Rank #1 – With a market capitalization of $422.96 million, the company is a fast growing manufacturer and seller of high-performance photovoltaic solar cells and solar power products based on crystalline silicon technologies. The company is based in Shanghai, the People’s Republic of China.

•    Earnings Per Share (‘TTM’) = 92 cents
•    Book Value per Share (as of June 30, 2015) = $17.59
•    Graham Number = SQRT (22.5 x 0.92 x 17.59) = $19.08

The stock is currently trading at $8.38 (closing price on Oct 2, 2015), implying a discount of 56.1% from the Graham Number.

The Travelers Companies, Inc. TRV – Zacks Rank #1 – Based in New York, the company is a leading provider of commercial and personal property, and casualty insurance products and services globally. It has a market capitalization of $31.13 billion.

•    Earnings Per Share (‘TTM’) = $10.73
•    Book Value per Share (as of June 30, 2015) = $77.96
•    Graham Number = SQRT (22.5 x 10.73 x 77.96) = $137.19

The stock is currently trading at $100.03 (closing price on Oct 2, 2015), implying a discount of 27.1% from the Graham Number.

Transocean Ltd. RIG – Zacks Rank #2 – The company, headquartered in Vernier, Switzerland, offers offshore contract drilling services for oil and gas wells globally. Transocean hold a market capitalization of $4.93 billion.

•    Earnings Per Share (‘TTM’) = $4.12
•    Book Value per Share (as of June 30, 2015) = $37.18
•    Graham Number = SQRT (22.5 x 4.12 x 37.18) = $58.70

The stock is currently trading at $13.56 (closing price on Oct 2, 2015), implying a discount of 76.9% from the Graham Number.

Moving Forward

“Teachers affect eternity; no one can tell where their influence stops”

This saying by Henry Brooks Adams is very apt in the context of the stock market. Although Benjamin Graham belongs to a different era, his teachings still hold relevance in today’s world. A smart investor can turn the fortune favorable in the current uneven environment by reasonably applying the principles of this great teacher in his investment decisions. Last but not the least, with the stock market being in a correction mode, now’s the time to look for the best value bargains as they hold much promise.

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