There's nothing like a doing some research in front of the fire on a cold day -- and not the kind of fire that was consuming parts of Athens over the weekend. Friday's column focused on Ben Graham's "Stock Selection Criteria for the Defensive Investor," the results of which were fairly compelling despite the small number of names that met the criteria.
This weekend's research was focused on identifying current candidates. While stock screens are not always consistently successful, building and following screens that reflect your investment philosophy can be helpful. Over time, you will get a sense of what works and what does not, as well as what criteria need to be fine-tuned.
By way of a reminder, below are the criteria used in this search (please note that I have made some modifications to Graham's criteria, because of data limitations or changes in the value of the dollar since 1973):
- Adequate size: We are using minimum sales of $500 million on a trailing 12-month basis (Graham called for minimum sales of $100 million and total assets of at least $50 million).
- Strong financial condition: We want to see a current ratio (current assets divided by current liabilities) of at least 2, and long-term debt that is less than working capital.
- Earnings stability: The company must have had positive earnings for the past seven years (Graham used a minimum of 10 years).
- Dividend record: The company has paid a dividend for the past seven years (Graham used 20 years).
- Earnings growth: We want to see at least 3% compounded annually over the past seven years (Graham used a minimum increase in earnings per share of one-third over the past 10 years).
- Moderate price-to-earnings ratio: The company must have an average P/E in the past three years of 15 or less.
- Moderate ratio of price to assets: The price-to-earnings ratio times price-to-book ratio must be less than 22.5.
- No utilities.
This time around, pickings are still slim, as five names made the cut. Interestingly, three of them, Cash America International (CSH), Reliance Steel and Aluminum (RS) and Universal Corp. (UVV), are holdovers from the last time. This is not uncommon, especially for screens based on Graham's work. (In fact, I recall one net-net identified in Graham's classic book The Intelligent Investor, National Presto (NPK), that was still a net-net more than 30 years later).
The new additions include AVX Corp. (AVX), a familiar name because it has traded very close to net current asset value over the past few years. AVX has had a rough go of it lately; third-quarter revenue fell 16% to $340.9 million, which missed the $368 million consensus estimate. Earnings per share also fell short of estimates by $0.05, coming in at $0.22. But the market all but yawned at the results, and AVX fell 2.5% on the day of announcement. AVX still maintains a solid balance sheet, with $862 million, or $5.07 per share, in cash and short-term investments, and no debt. The company currently trades at just 1.56x net current asset value and 10x trailing earnings. On a bright note, AVX recently increased its dividend 36%, to $0.075 per quarter, which implies a healthy 2.2% yield.
The other new addition is Diamond Offshore Drilling (DO), which is currently trading for 9x trailing earnings and yields 0.8%. This stock has had a fairly rough past year, down 14%, although year to date it has rebounded 13.5%.
Putting the five names together (equally weighted) yields some interesting portfolio statistics:
- Trailing 12-month price-to-earnings ratio: 11.6
- Price-to-book-value per share: 1.4
- Dividend yield: 1.67%
- Trailing 12-month net profit margin: 11.88%
- Quick ratio: 3.56
Now that's an interesting portfolio!
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