Wednesday, March 21, 2012

The Benjamin Graham formula

I have used the Benjamin Graham formula before to value stocks. It looks like this:

V* = EPS \times (8.5 + 2g)

EPS is the 12 months trailing earnings per share and g is the expected 10 year growth rate.

It is interesting that the Wikipedia page about this formula states that the formula is not intended to be used to evaluate stocks. If that is the case what is it for? The problem is that the growth rate is of course an estimate but it is still useful for making comparisons between stock valuations.

Lets plug in the numbers for five companies:


V = 35 * (8.5 + (2 * 20))
= 1700

Apple is 35% fully valued.


V = 30 * (8.5 + (2 * 20))
= 1450

Google is 43 % fully valued.


V = 2.75 * (8.5 + (2 * 10))
= 78

Microsoft is 41% fully valued.


V = 1.8 * (8.5 + (2 * 15))
= 69

Oracle is 43% fully valued.

Intuitive Surgical:

V = (12 * (8.5 + (2 * 20))
= 582

ISRG is 91% fully valued.

This is a very one dimensional analysis and obviously the growth rates are just a very rough estimate. However the results do suggest that the four tech titans are good value even after the recent market surge.

It is interesting to note the Google currently has a higher share price than Apple even though its EPS is lower and its growth rate is a lot slower. This is a situation that will not last.

I believe that the current Apple situation is an unusual one in that it is so obvious that the stock is undervalued and yet the stock price still fails to keep up with the business growth. I have taken advantage of this opportunity in a big way and as a result my two main portfolios are now very much in the black.

I own all four of the tech giants above and am seeking to buy more. We could well be at the start of a bull market. Don't miss out.


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