Among the revered of Wall Street few reach the lofty heights of Benjamin Graham, Warren Buffett's teacher, mentor and first Wall Street employer.
Graham is considered the father of securities analysis. He believed few investors could beat the market. Because of this, to do well he recommended a margin of safety in investing, which protects against the unexpected.
This margin is the difference between a stock's price and the company's underlying value. The lower a stock's price relative to its underlying value, the greater the margin of safety. In this way, even if the company encounters unexpected problems and its earning power declines a bit, the stock still might gain ground because it was so undervalued initially. To find undervalued stocks he focused on fundamentals, such as stocks whose price-to-earnings and price-to-book ratios were relatively low.
I created a Graham-based strategy that I have been following since July 15, 2003. In this time period it is among the very top performing strategies. In addition, it has left the S&P 500 in the dust. During the 11-plus years I have follow the strategy, it has produced an annualized return of 14.8%, more than double the S&P 500's 6.2% annualized return for the same time period. You cannot argue with success like that.
The Graham strategy likes Seaboard (SEB). The company is unusual in that it is in various different businesses. It is one of the largest vertically integrated pork producers and processors in the country. It sells pork domestically and internationally. It also provides containerized shipping services between the U.S. and Latin America. And it has other businesses, including a vertically integrated sugar and citrus operation in Argentina and Butterball, the largest vertically integrated turkey producer in the U.S.
Some aspects of Seaboard liked by the Graham strategy: it is not a technology company (you will probably recall that Buffett also largely avoids technology companies), it has large sales ($6.6 billion), a current ratio of 2.89/1 (minimum required is 2/1, this is a measure of liquidity), almost no long-term debt, and a moderate P/E ratio (13.79). The strategy also takes the price-to-book ratio and multiplies it by the P/E ratio and places a maximum on the result of 22. Seaboard's results are nicely below this max at 18.48.
Cheung Kong Holdings (CHEUY), another Graham-strategy favorite, is one of the largest developers of residential, office, retail, industrial and hotel properties in Hong Kong. Its sales are about $2.2 billion, while its current ratio is very high at 7.58/1. Net current assets are more than double its long-term debt and its P/E ratio is quite low at 9.49/1. Multiplying the P/B by the P/E provides a very low result of 8.64.