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We've talked a lot about momentum in recent months, and the Piotroski F-Score, as well. But now I want to talk about identifying even more opportunities, getting deeper into the realm of value investing. (And we'll make Tim Melvin happy in the process.)
To do that, I'm going to introduce you to one of the most important metrics in finance; it's how you can start to identify massive "turnaround" stock plays with big upside. This is classic "uncovering gems hiding in plain sight" stuff.
One of the greatest investors of all time used this method to become the (extremely wealthy) "Godfather of Value Investing." And no, it's not Warren Buffett, though he was highly influential on Buffett's style and approach to investing.
Let's talk about this simple metric that will change your investing forever.
Meet Mr. Ben Graham - One Very Intelligent Investor
You only need to understand Ben Graham's "Graham number" to understand and unlock the real power of value investing for yourself.
The formula is a "witches brew" of fundamentals - one part book value per share and one part earnings per share. Graham blended these two numbers to create his special Graham number. This figure would give us an intrinsic value to determine a stock's potential worth.
If you don't know book value per share, it's like this: a company's net worth, or the value of its assets minus its liabilities.
It's like peering into the company's financial fortress, understanding its solid foundation. Graham believed buying stocks below their book value was akin to finding a vintage Rolex at a yard sale.
The next factor, earnings per share, showcases a company's profitability and ability to generate those delightful streams of cash. You're tapping into the river of cash flow that pumps through the company. Graham emphasized the importance of investing in companies with consistent and robust earnings.
Now... here's the crazy formula: It's square root of 22.5 multiplied by the book value per share multiplied by the earnings per share.
If we look at the Graham number to the current stock price, intrepid investors can determine if a stock is undervalued or overvalued. If the stock price is significantly lower than the Graham number, you've got that hidden treasure on your hands - a rare opportunity to snatch up a potential winner.
Of course, it's not foolproof. But combining it with the Piotroski F-score (or just F-score) like I'm doing today with my Flashpoint Elite members, can create a deep value opportunity that could catch fire at any minute.
This is how I found SkyWest Inc. (SKYW) trading at $15 in January. Today, it's nearly $31 per share.
The Graham number and F-score are two of the most powerful tools we need to use to find great stocks, great options trades, and much more.(Click Here to master the fundamentals with me in Flashpoint Elite.)
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.