It remains apparent to me that the work of Benjamin Graham, considered to be the father of value investing, remains relevant today, four decades after he last published his investment theories and since his death, and more than 80 years since his books were first published. I still pick up his great work The Intelligent Investor from time to time, a must read even if you don't consider yourself a value investor.
I still also use Graham-inspired stock screens, including one based on his "stocks for the defensive investor" methodology. Last year at this time, I ran this screen, which is based on the following criteria, and after one year, thought it appropriate to review the results, good, bad, or ugly.
- Adequate size. A company must have at least $500 million in sales on a trailing 12-month basis. (Graham used a $100 million minimum and at least $50 million in total assets.)
- Strong financial condition. A firm must have a "current ratio" (current assets divided by current liabilities) of at least 2.0. It must also have less long-term debt less than working capital.
- Earnings stability. A business has to have had positive earnings for the past seven years. (Graham used a 10-year minimum.)
- Dividend record. The company must have paid a dividend for the past seven years. (Graham required 20 years.)
- Earnings growth. Earnings must have expanded by at least 3% compounded annually over the past seven years. (Graham mandated a one-third gain in earnings per share over the latest 10 years.)
- Moderate price-to-earnings ratio. A stock must have had a 15 or lower average P/E over the past three years.
- Moderate ratio of price to assets. The price-to-earnings ratio times the price-to-book ratio must be less than 22.5.
- No utilities or retailers
At the time, just five names made the cut: Corning (GLW) , Cooper Tire & Rubber (CTB) , Waddell & Reed (WDR) , Valero Energy (VLO) , and Baxter International (BAX) . All but CTB (-18%) were in positive territory during the period. VLO, which has benefited from the run-up in oil prices, was the best performer, up about 40%. BAX also had a nice run (+33%), putting up some better than expected earnings results over the past year. WDR did ok (+13%), while quiet, emerging dividend champion GLW, was up a less than stellar 8%, after giving back about 15% since late January.
Cutting to the chase, the group of five was up about 15% during the period, underperforming the S&P 500, which was up about 15.5%, and the Russell 1000 Index (+16.9%). It did better versus the Russell 1000 Value Index (+8.2%), which may be the most appropriate benchmark given the screen's value focus. Overall, however, how anti-climactic, but it is what it is.
Naturally, my next column would introduce the new vintage of qualifying "stocks for the defensive investor"; the problem is, there aren't any. No names make the cut at this writing. You can read into that what you will. The criteria are stringent after all, and the markets are not cheap, which leads me to wonder what Ben Graham would be doing in this environment; probably nursing some cash.
