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What Would Ben Graham Buy These Days?

Jonathan Heller | Contributor
Friday, 7 Dec 2012 | 11:55 AM ET
A Halliburton facility in Port Fourchon, Louisiana.
Mira Oberman | AFP | Getty Images
A Halliburton facility in Port Fourchon, Louisiana.

One of my initial columns for TheStreet.com back in May, focused on what names one on my investment heroes and the father of value investing Benjamin Graham, might be interested in if he were still alive today.

I surmised at the time that Facebook, which had commenced trading just days earlier, would not have been interesting Graham due to his reluctance to purchase initial public offerings because he believed, for one, that sellers have the advantage over the buyers in new issues.

Graham had several investment criteria he used to find compelling candidates, and this one in particular focused on identifying stocks for the "defensive investor," which he discussed in his great work "The Intelligent Investor." Due to the fact that the last edition of this book Graham published was in 1973, I did modify Graham's original criteria slightly:


1. Adequate Size: Graham excluded smaller companies; I've set the minimum market cap at $1 billion.

2. Strong Financial Condition: Minimum current ratio of 2; long-term debt must be less than working capital.

3. Earnings Stability: Graham required positive earnings for at least 10 consecutive years: I am using seven years.

4. Dividends: Graham required "uninterrupted" dividends for at least 20 years; I am using seven years here as well.

5. Earnings Growth: Graham sought a minimum increase of 33 percent in earnings per share in the past 10 years; I am using a minimum compounded annual growth rate in earnings of 5 percent over seven years.

6. Moderate Price-to-Earnings (P/E) Ratio: Average P/E should be less than 15 over the past three years.

7. Moderate Price-to-Assets Ratio: Graham sought companies with price-to-book ratios below 1.5, but would accept a higher P/E ratio, if price-to-book was lower. This end result was that P/E times price-to-book ratio should be less than 25.5.

8. Other: U.S. companies only; I excluded foreign companies and American depositary receipts from the results.

The search revealed just eight names that met these rather stringent criteria. Since my initial column ran in late May, these companies are up an average of 9.3 percent, slightly better that the S&P 500 which is up about 7.4 percent, and S&P Mid Cap Index which is up 8 percent during the same period.

The best performers of the group include UniFirst up 27.9 percent, Helmerich & Payne up 20.6 percent, Diamond Offshore Drilling up 18 percent, Universal Corp. up 13.5 percent and Halliburton up 10 percent, were also in positive territory.

One of the names I was most interested in, AVX, was down 3 percent, while Cash America International was the worst performer, down 12.2 percent, and Curtiss-Wright was down 0.2 percent.

For any of the value-related screens that I utilize, six months is far too short a period to claim success or failure, but it is still important to periodically review the results. As a value investor, holding periods are typically longer than for the average investor. Sometimes this is as exciting as watching the grass grow, or paint dry, but the rewards can be worth the wait. Only those with patience, however, need apply.

By TheStreet.com Contributor Jonathan Heller

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Additional Views: Trading Value Investing Congress Picks

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CNBC Data Pages:

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Disclosures:

At the time of publication, Jonathan Heller had no positions in stocks mentioned.

Disclaimer

  Price   Change %Change
FB
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S&P 500
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UNF
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HP
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DO
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UVV
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HAL
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AVX
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CSH
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CW
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