Graham-Style Fair Value

The core of the Graham model is the Graham Number, a simplified intrinsic value formula: Intrinsic Value = sqrt(22.5 x EPS x BVPS). The constant 22.5 is the product of Graham's maximum acceptable P/E ratio of 15 and maximum acceptable P/B ratio of 1.5. The geometric mean of these two boundaries produces a single fair value estimate that deliberately avoids projecting future growth and instead values the company based on what it has already earned and accumulated.

AlphaStocks calculates three scenarios rather than a single number. The conservative estimate uses lower-bound earnings and tighter multipliers, assuming recent earnings may be near a peak. The base estimate closely follows Graham's original formula using trailing twelve-month earnings and book value. The optimistic estimate uses normalized earnings and allows for moderate growth with higher but still disciplined multipliers. The range between conservative and optimistic is itself informative -- a narrow range suggests high confidence, while a wide range means the valuation is sensitive to assumptions.

Sector-specific adaptations ensure fair treatment across industries. Banks use book value-based valuation with tangible book value adjusted for loan-loss reserves. REITs use Funds From Operations (FFO) per share instead of traditional EPS. Utilities receive adjusted multipliers reflecting their regulated return environment. Insurers use adjusted book value accounting for investment portfolio quality and underwriting reserves.

A confidence indicator is computed based on data completeness, earnings stability, and sector fit. A high-confidence estimate with a narrow range is much more actionable than a low-confidence estimate with a wide range. The model then calculates the discount or premium versus the current market price, scores the stock based on the magnitude of the discount, and applies the confidence weighting.

The Graham-Style Fair Value model contributes 45% of the Value axis, which carries 15% of the composite score, giving it an effective weight of 6.75%. It is the highest-weighted component within the Value axis, reflecting the fundamental importance of intrinsic value assessment in any value-investing framework.

It pairs with Lynch-Style PEG Analysis (25% of Value), which specifically accounts for growth that Graham's formula ignores, and Greenblatt-Style Magic Formula (30% of Value), which evaluates earnings yield relative to return on capital. Together, these three models answer the Value question from different angles: Is the stock cheap relative to its earnings and assets? Is it cheap relative to its growth rate? Is it cheap relative to its return on capital?

A high-growth company that scores poorly on Graham-Style but well on Lynch-Style will still receive a balanced Value axis score. The Quality axis (Buffett and Piotroski) can also recognize that a growth company has strong fundamentals even if Graham considers it expensive. The composite score integrates all perspectives rather than letting any single model dominate.