It’s a new year, and a new quarter! That means it is time to run our Ben Graham Value Screens again and see what companies have made the cut.
As a reminder, in this series we look at 2 different Ben Graham screens; One for the “Enterprising Investor”, and the other for the “Defensive Investor”.
We will look at the specific criteria for each screen below, but in general an enterprising investor is one that carefully watches and manages their investments, so the screen is not as strict because the investor is able to move in or out quickly as required. While a defensive investor screen is made for an investor who plans on buying and holding for much longer periods, so the screen criteria is much more strict. So strict in fact that last quarter 0 companies made the cut.
Then, we take the companies that pass through the screen and create a Motif, using Motif Investing so that you are able to buy every stock on the list for 1 low price. With Motif Investing you can buy up to 30 stocks for a TOTAL of $9.95 in commissions. So if 25 stocks make the cut, don’t pay $250 in commissions with your broker! Move over to Motif Investing and save some money.
And lastly, I invest my own money into each and every one of the Motifs we create here on Begin To Invest. We have made Motifs for Real Estate Investors, for those trying to clone the portfolios of expensive fund managers and For Ben Graham value investors and more! This prevents a couple things: 1) It prevents spamming these types of articles here on Begin To Invest and 2) Forces me to really like the idea before doing the work and posting the idea here. Motif’s minimum investment for a Motif is $250 meaning that over the years, I have put a real, significant amount of money to work using these strategies.
As Warren Buffett said in his partnership letters, “I can’t guarantee you results, but I can guarantee that we share the same fate.”
With all of that out of the way, lets get onto the first screen:
Ben Graham’s Enterprising Investor Screen for the 1st Quarter of 2017
We take the criteria for the Enterprising Screen out of Ben Graham’s biography – The Einstein of Money
Where the screen is defined as:
- 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)
Last quarter, 19 companies made the list on Motif, and as a whole, they have performed very well:
But this is hardly a risk-free endeavor. Of the 19 companies on the list for last quarter, 1 stock is down 12%, another 30%, one down 42% and one down 54%!
So be careful selecting only certain investments from this list, as there are going to be very volatile stocks on the list.
Now into 2017, which companies make the list?
Even less than last quarter – only 15 make the cut now (and only 13 make the Motif this quarter as share prices must be greater than $5 per share to be in a Motif).
- Abercrombie and Fitch Company (Ticker: ANF)
- Beasley Broadcast Group (Ticker: BBGI)
- CSS Industries (Ticker: CSS)
- Cosan Ltd. (Ticker: CZZ)
- Highway Holdings Limited (Ticker: HIHO)
- Himax Technologies, Inc (Ticker: HIMX)
- Hurco Companies, Inc. (Ticker: HURC)
- Kelly Services (Ticker: KELYA)
- Kyocera Corp (Ticker: KYO)
- Nevsun Resources (Ticker: NSU)
- Nippon Telegraph & Telephone Co. (Ticker: NTT)
- P & F Industries (Ticker: PFIN)
- Pearson PLC (Ticker: PSO)
- Strattec Security Corp (Ticker: STRT)
- Xinyuan Real Estate Co. (Ticker: XIN)
At time of creation, this quarter’s collection of companies has an average P/E ratio of 10.9 and a very nice 3.50% dividend yield.
But these are not companies that have quite the history as those that would make Graham’s defensive screen below. They may be very risky, previous quarters have had several companies fail. But as a diversified group of holdings, they have performed well historically, and should provide exposure to deep value plays while providing a little protection from diversifying.
I can’t help but notice the trend we are seeing – less and less companies are passing these screens every quarter as the market gets more and more expensive. There may not be much value in the market these days, but these few holdings may help you find some!
For active investors willing to get dirty digging into financial statements and 10-Ks and 10-Qs – here is a great place to start.
Now onto the second of Ben Graham’s screens:
Ben Graham’s Defensive Investor Screen Results
As a reminder, here is the criteria we screen for in Ben Graham’s Defensive Investor Stock Screen:
- Size: Over $500 million market cap.
- 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.
And as always, I will show the companies that make the cut for the last 7 years (the longest my screener software goes back), then we will look into the financial statements of each specific company over the last 20 years and make sure they make the cut.
I do this so that investors can collect a couple more names of companies that don’t quite make Graham’s list, but may be on their way, or may still be decent investments just without the decades long history that Graham required. Also because, as we saw last quarter, fewer and fewer companies are making the list. So here is our initial screen, companies that meet the criteria only back the previous 7 years:
Only 1 company makes the list
Does Dillard’s have the history to pass Ben Graham’s stringent defensive investor screen?
Dillard’s reported a loss in 2008, disqualifying it from Graham’s defensive investor screen, which requires positive earnings over the last 10 years.
That means for the second quarter in a row, 0 companies pass Graham’s defensive investor screen.
Why Was Ben Graham So Selective?
When no companies pass Ben Graham’s test, what is a value investor to do? I think it is going to be tempting to put your money to work somewhere. Do you sacrifice on a company’s history? Or buy companies slightly more expensive, but still “cheap”?
I don’t know the answer to these questions.
But I do know that Ben Graham considered value investing as “buying a dollar for less than a dollar.” Graham would screen out companies that were trading at too high of a price to arrive at companies that were “deals”. At these cheap prices Graham considered that he had both a margin of safety because he was buying the companies at reduced prices and a chance for investment gains as the securities would eventually rise in price to reflect their true value. To me, that means if Graham couldn’t find that margin of safety, he wouldn’t invest. But I need to do more reading to find out exactly what Graham did at times the market got expensive.
Until then, enterprising investors have a few new stocks to read up on. For those looking to easily add a list of Ben Graham value stocks to your portfolio, consider Motif Investing and our latest Motif created here, which can be found on Motif’s website by clicking the blue “Invest” button below: