One of the nice things about the value investing approach is that it leaves you sufficient time for both adequate research and outside activities. This weekend, in addition to reading various newspapers and running screens, I still had time to watch the hoops tournaments, make a killer corned beef dinner and do some recreational reading. The results of one of my screen searches may be of particular interest and use to investors and traders alike.
In his book, The Intelligent Investor, Ben Graham spilt investors into two camps: the enterprising investor and the defensive investor. While the vast majority of my activities fall into the enterprising investor classification, looking for stocks suited to the defensive investor is still worthwhile. I often find bargains I have overlooked and the results contain information about the condition of the stocks market itself.
Graham believed that defensive investors should look for stocks of decent size with long histories of profitability and dividends. As always, he wanted to pay a decent price for them, so he suggested not paying more than 15x earnings or 1.5x book value. He wanted a strong financial structure with a high current ratio.
When I ran the defensive investors' screen, only four companies made the grade. While I do not make or use market calls as an investor, this does seem to suggest a sense of caution when approaching the markets right now. Graham was also an advocate of buying stocks when they were on sale, so it may be prudent to delay commitments even to defensive stocks in light of the recent run-up in the broader stock market.
Two of the stocks on the list are food and grocery related. The first, Nash Finch (NAFC), is the second largest publicly traded food distributor in the U.S. The company sells its product lines to retail grocery stores, as well as military commissary and exchanges in 36 states as well as Washington, D.C. and Puerto Rico. The company also has operations in parts of Europe and as well as in Cuba, the Azores and Egypt to serve U.S. military bases. They also own 75 retail grocery store, primarily in the upper portion of the Midwestern United States.
The shares certainly qualify as cheap enough, as they are trading at 0.85% of book value and 10x earnings. Debt is 545 of capital and the interest coverage is a very comfortable 3.7x. The current ratio is over 2, although much of that is inventory. Even during the recent economic nastiness, the company has been consistently profitable and has paid dividends for 364 consecutive quarters.
Weiss Markets (WMK) is our other grocery related company. The company owns 163 grocery stores, which are primarily located in the mid-Atlantic region of the U.S. The company has also been consistently profitable for over a decade and has paid a divided. The company owns about half its locations and also has a real estate operation that leases unused or excess location to other retailers. The company also has a current ratio above 2 and has no long-term debt on its books. At the current price, the stock trades at 12x earnings and about 12x earnings. So the shares are on the high side of the cheap equation, but WMK still qualifies as a defensive stock.
Both companies are coming off slow years and weak fourth quarters, as the retail grocery business continues to be difficult and highly competitive. Hurricane Sandy probably gave a little boost to sales at Weiss but it hurt military operations for Nash Finch because many ports were closed for several days. However, both stocks are cheap. And even though the business is cutthroat -- largely in part due to Wal-Mart's (WMT) presence in the industry -- people still have to eat. Both companies should be able to grow earnings at reasonable rates and maintain dividends for the foreseeable future.
On Tuesday, I will look at the other two companies that qualify as defensive investments.