Using Graham for Some Long-Term Picks

 | Apr 14, 2014 | 2:30 PM EDT
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I have no doubt that it will be an interesting week on Wall Street. The weekend press was full of prognostication and predictions about what the market might do to follow up on last week's selling spree.

Just to make it really interesting we start to get into the meat of earnings season with a flurry or reports due this week. It is tempting to throw my hat into the ring and add a confident prediction about what the market is going to do. But a review of my track record in predicting short-term market movements would suggest I resist this particular urge. Spotty would be an improvement to my market forecasting record, so I think I will just keep my head down and search for individual stocks that make sense for long-term investors.

I spent some time reviewing Ben Graham's well known 10 rules for selecting stocks. In the 25-plus years since I first read the Intelligent Investor and started studying Graham's work, I do not recall ever finding one single stock that met all of the criteria. But using a mix and match of the 10 rules I have come up with some fantastic sticks over the years. One of the better screens for finding stocks with market-beating potential that are safe enough for the most conservative investors uses five of the rules.

I simply look for stocks that yield at least two-thirds of the AA bond rate, have an earnings yield of twice that rate and that have doubled earnings over the last 10 years. Then I screen for those companies trading below book that own as much as they owe. This has been a market-beating strategy for years. If you ran this screen a year ago you had a 13 stocks portfolio of shippers, small banks and insurance companies that crushed the overall market by a wide margin.

When I run that screen today I get a total of 12 U.S. based companies that make the grade. Of the 12, eight re tiny companies that have market caps below $50 million. That does not bother me that much as I think liquidity is overrated by most people but they are too small to write about here. I will say that I think it is worth your while to run a screen and find these eight stocks. The four larger ones look very attractive to me and I would be willing to buy the regardless of market predictions.

Ampco-Pittsburgh (AP) makes forged hardened steel rolls and cast rolls for use in the steel and aluminum industries as well as air and liquid handling equipment, centrifuges pumps and heat exchange coils. The stock trades at 88% of book value and yields 3.6% at the current price. Although you are unlikely to confuse it with the mo-mo stocks, growth prospects for this company are actually pretty strong as the economy recovers in the future.

Nobel Corporation (NE) provides offshore contract drilling and production management services to the oil and gas industry. They have a fleet of 77 rigs that are deployed in Mexico, Brazil, the Middle East, India and East Africa. They have been updating their fleet and are well positioned to benefit from the deep water drilling market which is going to expand over the next decade. Currently, they have six units under construction, including two ultra-deep water rigs. The stock trades at 90% of book value and yields a comfortable 5.05%.

International Shipholding (ISH) is a repeat stock from last year. The stock was so cheap that we have do well based on our initial buy, and the stock still trades at just 62% of tangible book value. They have 50 ocean-going vessels carrying everything from petroleum products to automobiles. Several of their ships operate under the Jones act which allows them to carry products from port to port within the United States which is a valuable niche for the company. Even after appreciating 70% over the past year the stock is still cheap and yields 3.96% at the current price.

Chevoit Financial (CHEV) is one of my favorite little bank stocks and it fits the Graham criteria. They operate 12 branches in Hamilton County, Ohio and have a little under $600 million in assets. In addition to paying a generous dividend the bank has been buying back stock below book value. There are several activist investors and that could provide a catalyst for higher prices in the next year or two. The shares trade at just 75% of book value and yield 3.48% at the current price.

Using part of the Graham 10-point formula has uncovered many bargains for me over the years. It is not finding many right now, but there are a few stocks worth buying by long-term patient investors.

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