Top 10 Most Undervalued European Stocks According to the Graham Number

If you're looking to give your portfolio some exposure to Europe, the following list might offer a good starting point.

Here we present ten European companies that are undervalued when comparing current price to the fair value price, calculated by the Graham Number equation.

Benjamin Graham, the man who developed this equation, was a former mentor of Warren Buffett and is the so-called godfather of value investing.

The Graham Number, or the maximum price an investor should pay for a stock, is derived using only two data points: current earnings per share and current book value per share.

The Graham Number = Fair Value of a Stock = Square Root of (22.5) x (Earnings per Share) x (Book Value per Share).

The math of the Graham number is relatively straightforward. It is predicated on the belief that the price-to-earnings (P/EPS) ratio should be no more than 15, and the price-to-book value (P/BVPS) ratio should be no more than 1.5. Therefore we only include companies that meet both of these criteria.

From these criteria, the product of the two should not be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5, from which the equation was created.

Do you think these companies are undervalued? Use this list as a starting point for your own analysis.

Graham input data sourced from Yahoo! Finance, all other data sourced from Finviz.

List sorted by implied potential upside. (Note: Prices based on Friday's data)

1. Eni SpA (E): Major Integrated Oil & Gas Industry. Market cap of $93.97B. Italy. BVPS at $39.56, diluted EPS at $4.87. Graham number = sqrt(22.5 x $39.56 x $4.87) = $65.84. Current price at $47.10 (implies a potential upside of 39.79%). The stock has gained 6.68% over the last year.

2. UBS AG (UBS): Foreign Money Center Banks Industry. Market cap of $36.57B. Switzerland. BVPS at $13.23, diluted EPS at $2.00. Graham number = sqrt(22.5 x $13.23 x $2.00) = $24.40. Current price at $18.05 (implies a potential upside of 35.18%). The stock has gained 17.01% over the last year.

3. Ternium S.A. (TX): Steel & Iron Industry. Market cap of $6.94B. Luxembourg. BVPS at $29.33, diluted EPS at $3.10. Graham number = sqrt(22.5 x $29.33 x $3.10) = $45.23. Current price at $34.70 (implies a potential upside of 30.35%). This is a risky stock that is significantly more volatile than the overall market (beta = 2.24). The stock has lost 4.39% over the last year.

4. Delhaize Group (DEG): Grocery Stores Industry. Market cap of $8.03B. Belgium. BVPS at $66.88, diluted EPS at $7.17. Graham number = sqrt(22.5 x $66.88 x $7.17) = $103.87. Current price at $80.17 (implies a potential upside of 29.56%). DEG has a relatively low correlation to the market (beta = 0.7), which may be appealing to risk-averse investors. The stock has lost 3.54% over the last year.

5. Sanofi-Aventis (SNY): Drug Manufacturer. Market cap of $2.87B. France. BVPS at $28.08, diluted EPS at $2.88. Graham number = sqrt(22.5 x $28.08 x $2.88) = $42.66. Current price at $33.23 (implies a potential upside of 28.37%). SNY offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 4.43%, current ratio at 2.3, and quick ratio at 1.88. It's been a rough couple of days for the stock, losing 5.54% over the last week.

6. Credit Suisse Group (CS): Foreign Money Center Banks Industry. Market cap of $50.12B. Switzerland. BVPS at $30.67, diluted EPS at $4.21. Graham number = sqrt(22.5 x $30.67 x $4.21) = $53.90. Current price at $42.06 (implies a potential upside of 28.15%). The stock has lost 15.23% over the last year.

7. HSBC Holdings plc (HBC): Foreign Money Center Banks Industry. Market cap of $178.95B. United Kingdom. BVPS at $42.13, diluted EPS at $3.60. Graham number = sqrt(22.5 x $42.13 x $3.60) = $58.42. Current price at $50.43 (implies a potential upside of 15.84%). The stock has lost 0.35% over the last year.

8. STMicroelectronics NV (STM): Semiconductor Industry. Market cap of $10.80B. Switzerland. BVPS at $8.61, diluted EPS at $0.92. Graham number = sqrt(22.5 x $8.61 x $0.92) = $13.35. Current price at $11.73 (implies a potential upside of 13.81%). After a solid performance over the last year, STM has pulled back during recent sessions. The stock is 7.06% below its SMA20 and 3.06% below its SMA50, but remains 27.24% above its SMA200. The stock has gained 33.56% over the last year.

9. Ensco plc (ESV): Oil & Gas Drilling & Exploration Industry. Market cap of $8.02B. United Kingdom. BVPS at $41.69, diluted EPS at $4.11. Graham number = sqrt(22.5 x $41.69 x $4.11) = $62.09. Current price at $55.38 (implies a potential upside of 12.12%). The stock has gained 28.29% over the last year.

10. Koninklijke Philips Electronics NV (PHG): Electronic Equipment Industry. Market cap of $30.30B. Netherlands. BVPS at $22.24, diluted EPS at $2.13. Graham number = sqrt(22.5 x $22.24 x $2.13) = $32.65. Current price at $31.15 (implies a potential upside of 4.81%). The stock has lost 5.13% over the last year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.