A New Year for the stock markets – That means it is time to run our Ben Graham Value Screens again and see what companies have made the cut this quarter!
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 first a couple things to know about these two stock screens; a “defensive investor” screen, and an “enterprising investor” screen:
The enterprising investor stock screen is not as strict as Graham’s defensive stock screen. Ben Graham describes an enterprising investor as one who keeps a careful eye on their investments, and is ready to buy or sell as news changes. Whereas Graham’s defensive screen is designed to find stocks for those that an investor should feel comfortable buying and holding without closely following. The defensive screen criteria is so strict in fact that 0 companies made the cut for the entire 2017!
Then, as part of this series, 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 current broker! Move over to Motif Investing and save some money.
Once you have an account at Motif, you can buy the results from this screen with one click here.
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, 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:
We take the criteria for these screens out of Ben Graham’s biography – The Einstein of Money
Ben Graham’s Defensive Investor Stock Screen Results for 1st Quarter 2018
“The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition. Aggressive investors may buy other types of common stocks, but they should be on a definitely attractive basis as established by intelligent analysis.”
– Ben Graham in The Intelligent Investor: The Definitive Book on Value Investing
Where Graham’s defensive screen is defined as:
- Size:Over $500 million market cap.
- Current Ratio:Greater than 2
- Earnings Stability:Positive earnings over last 10 years
- DividendRecord: 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 always show the companies that make the cut for the last 7 years (the longest my screening 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.
Unfortunately, the results are slim. This quarter, like all of 2017, 0 companies make the cut for Ben Graham’s Defensive Investor Screen this quarter.
In fact, no companies even make the cut for just 7 years of history, not to mention the 10 or 20 years required for Graham!
So still, just like last year, we are stuck wondering how to invest in the current market environment. As the market gets more and more expensive, should investors reach for less quality stocks, or sit out?
But let’s get into looking at the enterprising stock screen, which should turn up at least a few investment options:
Ben Graham’s Enterprising Investor Stock Screen for the 1st Quarter of 2018
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)
This Quarter’s Enterprising Screen Results:
The number of companies that even make Ben Graham’s enterprising investor screen continues to shrink. This quarter, just 11 make the cut:
- Aceto Corp (Ticker: ACET)
- Bed Bath & Beyond (Ticker: BBBY)
- Cato Corporation (Ticker: CATO)
- Cemtrex inc. (Ticker: CETX)
- Chicago Rivet & Machine Corp (Ticker: CVR)
- Entercom Communications (Ticker: ETM)
- Kyocera Corp (Ticker: KYO)
- Lifetime Brands (Ticker: LCUT)
- Network-1 Technologies (Ticker: NTIP)
- Strattec Security Corp (Ticker: STRT)
At time of creation, 9 of the companies make the Motif (CETX and NTIP have share prices under $5, so they can not be added to the motif, but their performance will still be tracked separately for future updates).
An equal weighted motif made up of the 9 names has an average P/E ratio of 16.82 and a solid 3.03% dividend yield.
You can check out the motif, and buy all 9 stocks that make up the Motif for just $9.95 by clicking the blue invest button below:
How Do We Invest in an Expensive Market?
As the market gets more and more expensive, it is getting harder and harder to find worthy new investments. So what is a value investor to do?
I’m still thinking about that myself. But here are a few things I know:
Ben Graham advocated to always remain at least somewhat invested in the stock market, here’s a quote from his classic, The Intelligent Investor:
“We recommend that the investor divide his holdings between high-grade bonds and leading common stocks; that the proportion held in bonds be never less than 25% or more than 75%, with the converse being necessarily true for the common-stock component; that his simplest choice would be to maintain a 50-50 proportion between the two, with adjustments to restore the equality when market developments had disturbed it by as much as, say 5%. As an alternative policy he might choose to reduce his common-stock component to 25% “if he felt the market was dangerously high” and conversely to advance it toward the maximum of 75% “if he felt that a decline in stock prices was making them increasingly attractive”.”
And we know that markets are impossible to time perfectly. Selling all of your equity allocation now could hurt you much more than simply riding out the inevitable decline. I always like to cite an example from 1996, when Alan Greenspan said his now famous “irrational exuberance” speech on December 5th, 1996. Greenspan knew stocks were expensive and it was very rare for a Federal Reserve Chairman to openly warn investors about market valuations.
So what did stocks do after Greenspan’s warning? They kept rising – for more than 3 years!
Stock did eventually fall, but to a level only 15% below where they were when Greenspan initially said his warning. An investor who listened to Greenspan, would have had to been very disciplined to remain out of the market for those years, and would have had to time their re-entry into the market nearly perfectly in order to capitalize.
Ben Graham would adjust his allocation a little bit at a time, and recommended never going less than 25% stocks. So, if you are concerned about stock market valuations today, take 5% of your stock exposure and put it into cash, short term bonds, or something else where it can be re-deployed into investments once valuations come down – but keep some exposure because a bull market can go on a long time.
A Quick Look Into this Quarter’s Enterprising Stock Screen Results
I like to take a closer look into a couple of the names that come up for each screen.
Several of the names on the list have been on the list from last years’ screens. In our last Ben Graham screen update we looked in to Stratec and Aceto corporation, which are still on this quarter’s screen. So if you have not looked at that post, check it out.
This quarter we are going to look at a couple of the new entrants on the list:
Lifetime Brands (Ticker: LCUT)
I was intrigued to see lifetime brands on the list.
The company is unexciting, but seeing a consumer staples company trading cheap enough to be on Ben Graham’s list was surprising. I imagine companies like this, with strong brand names, shelf space and distribution to be able to produce consistent profits over the long term. 10 years from now I think we will still be using knives to cut food with, mixers to make cookies and cakes, and eating off of plates. That made me want to look a little deeper.
A little background – Lifetime brands is a big seller in kitchenware, tableware, and housewares, owning or licensing many brands that you may have heard of. KitchenAid and Faberware being the big two:
Quick rundown on Lifetime’s ratios and why it made Ben Graham’s screen:
- Current Ratio: 3.3 – the company has a strong balance sheet
- Earnings: The company has had positive earnings since 2009.
- Dividend Record: The company currently pays a dividend of $0.17 per year. A yield of about 1%. The company cut the dividend in 2010 and 2011, but has been slowing raising it since.
- Earnings Growth: Earnings today are higher than those of 7 years ago. Barely though. It is also worth noting that the company will likely fail to make this screen next year unless it can produce net earnings of over 21 million in 2018 (up about 35% from 2017’s estimated full year numbers)
- Price: Lifetime Brand’s price is just under 1.2x book. Currently 1.16.
Sales of the company’s brands have been solid. There has not been a down year in revenue since the 2008/2009 crisis:
But this company will probably never have explosive growth either. I think the most you can hope for is low single digit growth organically, and them making smart acquisitions to continue to increase their product lines.
And while sales have been rising pretty steadily, profit margins are ultra-low – Around 2.5% and cash from operations is not rising with respect to revenue:
So fundamentally, I can’t imagine business would ever evaporate overnight, but it hardly seems like lifetime brands has a solid competitive advantage, even with their distribution, brand recognition, and shelf space.
Or, you can hope for a takeover, which almost happened in early 2017 when a private investment firm, Mill Road offered to buy the company for $20 per share (currently as of early 2018, shares trade around $17).
Lifetime’s board rejected the offer. Obviously implying they believe the company is worth well over $20 per share.
What else is there to like? Insiders own nearly 22% of the company, clearly putting their money where their mouths are:
Lifetime Brands – The Risks
So why is the stock cheap? Unlike some stocks that usually make the Ben Graham screens, it is not because the share price has plummeted lately. Shares have been pretty steady since 2011. Book value has just slowly creeped up and earnings have remained.
The companies declining margins are concerning. In 2010 the company had $443 million in revenue and had an operating income of $29 million. This year, sales should be around $590 million and operating profit will likely be around $26 million. And that is not cherry picking the data either. Operating income has been lower every year since 2010.
So despite business not seeming that solid, there are other risks in their business model. Their most successful brands are licensed, not owned:
The Faberware brand is locked in with a royalty-free license until 2195, so no real concern there. The KitchenAid brand license runs out in 2018. Lifetime Brands has renewed the license agreement several times since originally signing a licensing agreement in 2000. I would need a little more research to feel comfortable making a long term bet on Lifetime Brands with this license expiring.
Lifetime Brands – In Summary
The stock represents one of the few sources of “value” in today’s market. At a time of near highs in stock market valuations, that means there are going to be notable concerns.
The company has some very strong brand names, with a business that should be pretty stable. The company has a decently strong balance sheet, which should help comfort investors who want to take a risk in the company’s shares.
Do the positives outweigh the negatives? I’m not convinced, but I’ll be watching the company closely.
Chicago Rivet and Machine Corp (Ticker: CVR)
Last company to look at from this list, another newcomer to the Ben Graham Screen, Chicago Rivet and Machine Corp
Note, this is a small company with a market cap of just $30 million. That means liquidity may be an issue, share prices may be volatile, and spreads large.
I have a soft spot for simple, well run companies. This company is another boring, seemingly “simple” company with a long history of grinding out profits and value for shareholders. It’s 10-k is only 17 pages for god’s sake, it’s wonderful!
Quick Facts on Chicago Rivet and Machine Corp
The company has an 83 year history of paying dividends and currently pays a solid 2.82% dividend yield. The company also has a history of high one-time, special dividend payments to shareholders.
The company has $0 long term debt, and current liabilities are just $3.7 million. It has more than twice enough money in CDs to cover all of the companies liabilities for the next year! As solid of a balance sheet as you will see.
But, business is cyclical. A large chunk of their business comes from the auto industry, which you could argue is seemingly dangerously close to a market cycle top.
However, the company has been around a long time. The company’s CEO has been with the company since the 50s. The company has no debt. It should be able to handle a slow down (and looks like the are geared up for one, maybe a telling sign!)
What Does The Company Do
Most (~90%) of the company’s sales come from it’s fastener business. A smaller part of the business (but growing faster) is selling riveting machines, parts, service, and designing custom machines for manufacturers.
CVR – Valuation
The company is pretty cheap. Here’s a few quick valuation multiples:
- Trading at less than 2x Working Capital
- Trading at just over 1X book value
- P/E of about 15
- Current Ratio of about 7
Other Good News for CVR
I see two big catalysts for the company:
- First, the new tax law. Currently this company pays very high tax rate – about 33%. That will go down to below 21% with the new tax bill. That adds $200,000+ in net income next year.
- Second, increased infrastructure spending. Trump is talking a $1 trillion+ spending bill to boost infrastructure spending. Will that boost the company’s non-auto and appliance business?
CVR – The bad
Sales have declined a little over the last year, down ~3.5% from 2016. This is probably expected since the auto industry was expecting a slow down. But this is not a growth company by any means.
Business is also cyclical. So if the thought of seeing earnings drop 30% (like they did between 2014-2015) in a year will scare you, this might not be the right stock.
Just to give you an idea on how bad things can get: In 2009 the company lost $1.33 per share, cut its dividend almost in half and saw sales fall 40%. As it seems we are closer to a top in the auto industry cycle than the beginning, you have to think another slowdown is coming. It is unlikely to be as bad, but it will come sooner or later.
The company’s sales are concentrated. From the most recent 10-K: “Our sales to two customers constituted approximately 31% and 33% of our consolidated revenues in 2016 and 2015, respectively. Sales to TI Group Automotive Systems, LLC accounted for approximately 19% and 21% of the Company’s consolidated revenues in 2016 and 2015, respectively. Sales to Fisher & Company accounted for approximately 12% of the Company’s consolidated revenues in 2016 and 2015.”
Dividends are also volatile. They have continuously paid dividends for 83 years, but that does not mean that the dividend rate has not been cut before.
CVR – In Summary
I can only spend so much time talking about a small company like CVR (this write up is already 1/4th the length of their 10-k!)
The company has a rock solid balance sheet, strong insider ownership, and seems to take care of shareholders. Rivets in cars and appliances aren’t going away anytime soon.
I’m not sure timing is the best right now, but I also would not lose sleep if the stock started to fall, because of the debt-free balance sheet. The company has 2 years’ worth of operating expenses in cash!
But shares are down 20% over the last year, so I’m not so sure a little decline isn’t already priced in.
Update on Previous Ben Graham Screen Results
Here are trackers for previous Ben Graham Value Screen results:
2016’s screen has underperformed the market, while 2017’s screens have trounced the market – which is pretty impressive considering it was a pretty high-flying market in 2017! Not the environment you would think value stocks would outperform.
Ben Graham Investing – In Summary
These screens are hardly a ticket for easy stock market gains. But they do provide a quick way to find some sort of value in today’s expensive market. Hopefully this gives you a few 10-ks to read over, and you can find a hidden gem!
That’s all for this quarter. Good luck and happy investing!