Taking Advantage of a Proven Strategy

 | Oct 31, 2012 | 5:31 PM EDT  | Comments
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In the world of investing, Benjamin Graham is about as revered a name as there is. Warren Buffett went to graduate school at Columbia University specifically to study with Graham, who was teaching there. Graham, in fact, is considered the father of investment strategies.

Years ago, I decided to read about the investment strategies of Wall Street's greats and to automate them so I could immediately analyze stocks using their investment techniques. That is the basis of my website, Validea.com. One of the first gurus whose strategy I automated for Validea.com was Graham. I have been following this strategy since July 2003, and never for a moment have I been sorry I included it. Of all the strategies I use, Graham's is about the best performing. Many on Wall Street revere Graham, and with good reason.

Since July 2003, Graham's strategy has provided an annual return of 12.3%. That is more than three times the S&P 500's return of 3.8% for the same time period. A track record like that is hard to argue with.

So, which companies is the Graham strategy now recommending? One company that earns a high Graham grade is Helmerich & Payne (HP) . This company is primarily engaged in contract drilling of oil and gas wells for exploration-and-production companies, and it is one of the major land and offshore platform drilling contractors in the world.

The Graham strategy likes the size of Helmerich & Payne's market cap of $3 billion, its strong current ratio (a measure of liquidity) of 2.28:1, its moderate long-term debt in relation to net current assets ($235 million in long-term debt and $529 million in net current assets) and its reasonable P/E of 14.1, using the P/E average over the last three fiscal years. A further variable used by this strategy (and only by this strategy among all of my guru strategies) is multiplying price-to-book by P/E and limiting the acceptable results to no more than 22. For Helmerich & Payne, this comes out to 19.7. It's a star performer in an industry that is doing well.

Another Graham favorite is National Presto Industries PVH (NPK) , which sells small kitchen appliances, housewares and other products primarily under the Presto nameplate. The company's sales are an acceptable $438 million, its current ratio is an impressive 5.24:1, and it has no long-term debt. The price-to-earnings ratio, averaged over the last three fiscal years, is a conservative 11.69, and the price-to-book multiplied by the P/E comes to 19.1, nicely below the 22 maximum allowed.

Both of these companies are, from a financial viewpoint, conservatively managed, while having well-priced stocks and solid histories of performance. The Graham strategy has proven its staying power over time, and taking advantage of its recommendations has been a solid strategy to follow.

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