When it comes to stock screening, sometimes you win, sometimes you lose and sometimes you need to be patient in order to see how a concept plays out over time.
One of the handful of value-related screens, and perhaps the most stringent one that I run, is based on criteria developed by Ben Graham: "Stock Selection Criteria for the Defensive Investor."
Purists probably cringe at the alterations that I've made to the screen, but some were necessary. And I've maintained this criteria set for years and have no to plans to alter it, despite recent trials.
- Adequate size: We are using minimum sales of $500 million on a trailing 12-month basis. (Graham called for minimum sales of $100 million and total assets of at least $50 million.)
- Strong financial condition: The company must have a current ratio -- current assets divided by current liabilities -- of at least 2 and long-term debt must be less than working capital.
- Earnings stability: The company must have positive earnings for the past seven years (Graham used a minimum of 10 years).
- Dividend record: The company must have paid a dividend for the past seven years (Graham used 20 years).
- Earnings growth: Growth must be at least 3% compounded annually over the past seven years (Graham used a minimum increase in earnings per share of one-third over the past 10 years).
- Moderate price-to-earnings ratio: The stock must have traded at an average P/E of 15x or less in 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.
One of my earlier columns since rejoining Real Money late last fall revealed just four qualifying names: Corning (GLW) , Helmerich & Payne (HP) , Joy Global (JOY) and Finish Line (FINL) . That group has done well and is up about 43%, led by JOY's 82% run.
In January, I revealed the next vintage, which also included four names: Tesco (TESO) , Cummins (CMI) , Innophos Holdings (IPHS) , and Waddell & Reed Financial (WDR) . That group is up by more than 35% since, led by IPHS' 80% run, but hampered by WDR's 25% haircut.
The markets were changing rapidly in those days and so was the output of my Graham screen. In late March, I ran the screen again, which revealed four new names: Westlake Chemical (WLK) , Dillards (DDS) , Cooper Tire & Rubber (CTB) , Stage Stores (SSI) and one holdover from January, Waddell & Reed. Suffice to say, the third time has not been the charm in this case and that group of names has struggled and is down about 13%. That's horrendous performance in an up market. Just WLK is in positive territory and the two retailers in the group, DDS and SSI ,are both down more than 25%.
Smarter folks than I perhaps might alter their screen at this point and exclude retailers, and perhaps financials, as well. I am sticking with it as is -- good, bad and ugly.
In Friday's column, I'll reveal the current group of qualifiers and by way of a preview, there's just one new name, and three holdovers. It's rather boring in value land these days.
