This is a continuation of our “Ben Graham Value Screens” series, where we look at investment opportunities based on the criteria that Ben Graham used and that is outlined in his (excellent) biography, The Einstein of Money.
Here we present the results from 2 different screens. Ben Graham’s “Defensive Investor” screen and “Enterprising Investor” screen. But, remember from his book The Intelligent Investor
“Defensive” does not mean “safe” like may be implied today.
Graham split all investors up into 2 categories, defensive and enterprising. Graham said, defensive investors do not spend a lot of time on their investments (much more passive in their investment actions), while enterprising investors follow their investments constantly, (and are much more active day to day monitoring their investments). For this reason, you will see that the “Defensive” screen is much more limiting as the investors who buy these will not be paying as close of attention to their investments. These stocks would theoretically have a little extra margin of safety to compensate for this.
With that in mind let’s see which companies make the cut as we enter the final quarter of the year:
Ben Graham Screen 1 – For the Defensive Investor
As a reminder, the screen’s criteria is:
- Market Cap: Over $500 million.
- Current Ratio: Greater than 2
- Earnings Stability: Positive earnings over last 10 years
- Dividend Record: 20 years of dividend payments
- Earnings Growth: 33% growth over last 10 years.
- Price-to-Book (P/B) Ratio: Less than 1.5
- Price-to-Earnings (P/E) Ratio: Less than 15.
First, let’s take a look at how the companies that passed our screen last April have performed. If you recall, 2 companies made the cut. Corning Inc. (Ticker: GLW) and Wolverine World Wide, Inc. (Ticker WWW).
As we can see, this screen has performed phenomenally since April! (The blue line represents the S&P 500 index, green is Corning and pink is Wolverine). Of course, this means nothing for future performance of those stocks or any highlighted below.
My screening software that I use (AAII’s stock investor Pro) currently goes back 7 years. As usual, here is the list of companies that make the cut after only applying a 7 year limit on earnings stability, growth and dividend history. I present this for those looking to “jump the gun” and looking to investigate quality companies that are not quite up to Graham’s standards:
Who makes the cut after applying Graham’s more strict guidelines? To see if these companies make it through I go through lots of annual reports (It is usually only a few companies, and it provides good reading material on stocks that should probably be “on my radar” as they have decent fundamentals and at least a 7 year history of decent performance), here is what I found after a few hours of reading:
- Dillard’s (DDS) – gets cut due to a loss in 2008.
- Strattec Security (STRT) – Is removed from the list because it did not start paying dividends until 2008.
- Ericsson (ERIC) – Halted their dividend payment from 2001 to 2003 (But besides those years had paid a dividend since 1989 through today! – In case you are a little forgiving of this 3 year break)
That means NO companies make it through Ben Graham’s Defensive Investor Screen as we start the quarter!
Is this evidence that the market is getting too expensive? That value investing is getting too popular?
I don’t have a clue, and unfortunately I don’t have the historical data to see how common this is. (Anyone have any input on this? Please comment below!)
But, we need some homework this quarter, so let’s relax our criteria a bit and look at another one of Ben Graham’s screens, his “Enterprising Investor” stock screen. As a reminder, the screen’s criteria is:
Screen 2 – For the Enterprising Investor
- Current Ratio: Greater than 1.5
- Earnings: Must be positive over the last 5 years
- Dividend Record: Must pay a dividend currently
- Earnings Growth: Must be positive over last 7 years
- Price: Must be less than 1.2x TBV (Tangible Book Value)
But first, how have the companies that made it through this screen last April perform? In April, 23 companies made it through, here is how each has performed since April:
- Acme United (ACU) +21.77%
- Atwood Oceanics (ATW) -8.80%
- Beasley Broadcast (BBGI) +46.44%
- Celadon Group (CGI) -12.53%
- Chicago Rivet and Machine (CVR) +20.50%
- ComX International (CIX) +12.19%
- CSI Compressco (CCLP) +61.09%
- CSS Industries (CSS) -9.07%
- Global Partners (GLP) +13.48%
- Graham Holdings (GHC) +2.73%
- Holly Frontier (HFC) -26.25%
- Hurco Companies (HURC) -11.96%
- NN, Inc. (NNBR) +55.82%
- Olin (OLN) +14.70%
- PDL Biopharma (PDLI) -37.14%
- Reliance Steel and Aluminum (RS) +22.58%
- Rocky Brands (RCKY) -32.55%
- Scholastic (SCHL) -1.08%
- SpartanNash (SPTN) +7.49%
- Triumph Group (TGI) -40.27%
- Western Digital (WDC) -31.91%
- WestRock (WRK) -12.44%
- WSI (WSCI) -28.27%
You will notice this is certainly no path to easy riches. There are a lot of big losses even for these “quality” companies. If you had invested $100 in each of these names ($2300 in total), you would have $2326 today, a gain of 1.15%. In other words, this group of companies underperformed the S&P 500 by about 3.65% since April.
This time, once again 23 companies make it through (only a few repeats from April):
Which of these companies have a promising future? Like you, I have a lot of reading to do!