Last year will go down as a good one for the stock market, but not so much if you followed the dictates of the father of value investing, the legendary Benjamin Graham.
Graham was among the first to formalize a stock market strategy, which he then wrote about in best-selling books dating back to the 1930s (he died in 1974). He is revered by many savvy investors today, including Warren Buffett, who was a student of Graham's at Columbia University.
While the S&P 500 rose 11.4% in 2014, the strategy I modeled after Graham's writings fell 22.9%. That means the overall market outperformed the Graham strategy by over 34 percentage points. Which is why I want to tell you about stocks currently in favor with, yes, the Graham strategy.
You are probably asking: Why pay any attention to a strategy that got so soundly beaten by the market? Because Graham's reputation as one of the greatest stock market investors is well earned. No one beats the market year after year, decade after decade, including Graham. We all have bad hair days, even legends.
Also, while 2014 was a bad one for my Graham strategy, the strategy has an enviable long-term track record. Since I started following it in July 2003, it is up 247.0% versus a 100.2% gain for the S&P 500 during the same time period. Among the dozen strategies I follow, the Graham strategy is among the top three, long term, with an annual average return of 11.4%.
And let's not forget that when an investor, strategy or mutual fund has a notably bad year, it often bounces back the following year with a stellar performance. (Conversely, an uncommonly good year often presages a poor year.)
The Graham strategy looks for solid companies that are financially conservatively managed and have well-priced stocks (this is classic value investing), and this strategy should work well in 2015 as it has in most years.
Reliance Steel & Aluminum (RS) is an example of a company that meets the Graham strategy's stringent requirements. Reliance Steel is North America's largest metals service center, with a network of more than 300 locations in 39 states plus 12 countries outside of the U.S. The company provides metals processing services and distributes more than 100,000 metal products.
Reliance Steel is managed with fiscal conservatism, witnessed by its current ratio (a measure of liquidity) of 3.86:1, nearly double the 2:1 required by the Graham strategy. Long-term debt is less than net current assets and the stock is well priced, with a modest price-to-earnings ratio of 13.25.
Chart Industries (GTLS) manufacturers engineered products and systems for cryogenic and gas processing applications used by industries such as natural gas processing, metal fabrication, biomedical and food and beverage, among others. The company's current ratio is a solid 2.32:1, its long-term debt is considerably below its net current assets and its P/E ratio is a reasonable 14.20.
If you are looking for a conservative strategy to use in 2015, the Graham strategy just might be for you. It is proven, it is financially circumspect and it had a lousy 2014, which means it may do very well this year. These are good reasons to pay attention to companies liked by this strategy, such as Reliance Steel and Chart Industries.