The four stocks that my "Ben Graham screen" uncovered back in November are all in positive territory and up about 11% on average -- way better than the roughly 2% drop that the S&P 500 has seen since then.
Graham, a late legend among value investors, developed his "Stock Selection Criteria for the Defensive Investor" before I was even born. But while some consider his theories antiquated, I believe they not only remain relevant but can actually deliver solid stock picks today.
By way of a refresher, below are the criteria that my "Ben Graham" screen uses. Some diverge from Graham's original criteria due to data limitations and/or changes in the U.S. dollar's value since 1973. However, I've successfully used this version of the screen for many years:
- 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. Utility stocks are out.
While this screen revealed just four names back in November, that small group is handily beating the S&P 500. Let's check them out:
Finish Line (FINL)
This sporting-goods retailer has been the strongest of the screen's four names, rising 23% since November. However, Wall Street isn't particularly enamored with FINL, as the stock is still down some 34% from last summer.
Finish Line last week announced better-than-expected fourth-quarter earnings of 83 cents per share vs. the 80 cents that analysts had expected. Quarterly revenues also beat forecasts, coming in at $580.3 million vs. the $567.8 million analysts had called for.
However, FINL disappointed investors by lowering fiscal 2017 earnings guidance to $1.50 to $1.56 a share compared to the $1.70 consensus that analysts had been predicting.
The Rest of the Portfolio
As for the screen's three other names, Corning (GLW) is up about 10%, while Helmerich & Payne (HP) has risen about 7% and Joy Global (JOY) is up 4%.
That's not bad so far.
The Bottom Line
I'm somewhat pleased with this screen's results to date, but we'll need more time -- at least a full year -- before declaring victory or defeat.
Until then, I'll continue to monitor these four stocks going forward. I'll also reveal some new Graham-like "contenders" in one of my upcoming columns.