I am always on the hunt for cheap companies, and one of the means of identifying “cheap” I like to use is the Graham number.
Its formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally, take the square root. As with any valuation, the Graham number only tells part of the story, and it’s important to look at the story behind the numbers to see if there are underlying reasons why the company appears so cheap.
Last week, I discovered that the financial sector is among the cheapest sectors out there when it comes to the Graham number. The reasons for this are varied, so I will be taking a deeper look at the 27 financial companies that currently trade below their Graham valuations to see if there is real value in the company, or if there is an underlying reason investors should avoid the stock in question. I will then make a CAPScall on the future performance of the company. Up next will be SunTrust Banks, Inc. (NYSE:STI).
What is it?
Atlanta-based SunTrust is a “traditional” bank that operates primarily throughout the Southeast United States. With over 1,600 branches and 2,800 ATMs, SunTrust serves over 5 million clients and has over $170 billion in assets. As with other banks of similar size, SunTrust is required to pass annual stress tests run by the Federal Reserve. During last year’s test, SunTrust Banks, Inc. (NYSE:STI) was near the bottom with a Tier 1 capital ratio of 5.5% when simulated “stressors” were placed on the bank.
At the end of last year, however, SunTrust Banks, Inc. (NYSE:STI) reported a Tier 1 capital ratio of 11.1%, showing great improvement over the course of the year. We’ll know for sure how well this improved ratio stands up when the latest round of stress test results are published on Thursday afternoon.
How cheap is it?