While watching the Baltimore Orioles capture their first American League East title in 17 years Tuesday night, I spent some time playing with the stock screen on the American Association of Individual Investors web site.
AAII has some really cool screens that they run each week, based on various theories of investing. They have no horse in the growth-versus-value race and provide screens based on a wide range of approaches for Ben Graham to William O'Neill and in between.
I spent a bit of time with the screens and was a little surprised that one of the best performers was the Graham Defensive Investor. This screen limits the investor to larger companies with a long history of earning a profit and paying dividends. It then screens to reduce the pool to just those with strong balance sheets selling at a reasonable combination of earnings and asset values.
They modify the upper limits somewhat of the Graham number calculation of value to adjust for current interest rates. They use Graham's formula of 4.4 / Aaa bond yield. That's an interesting tweak that never occurred to me. According to AAII, the screen has returned 20.8% over the past five years and 18.8% a year over the last decade.
It's an easy screen to replicate so I sat down this morning and ran a Graham screen using the interest rate modifier. As with all value-oriented screens I run these days, it is a limited list of just 12 stocks. But there are some names worth considering. I would note that Graham suggested about 30 stocks as an ideal portfolio size. An investor using this approach would only be about 36% invested if they were putting new money to work today.
Oil services firms are well represented on the list. With crude oil down about 11% in the past quarter, energy names have been weak. Delayed capital spending by some of the major oil companies has weighed somewhat in the services sector. Tidewater (TDW) is the cheapest oil services firm on the list. It is one I have had my eye on as the price has declined recently.
Tidewater uses a fleet of marine vessels to provide services like towing of and anchor handling for mobile offshore drilling units, transportation of personnel and supplies and offshore construction. The stock is trading at 80% of the Graham number valuation. That is more interesting to me as an asset-based guy with just 85% of book value. The company has a long history of dividend payments and the shares currently yield 2.16%.
Universal Group (UVV) has seen its shares sell off after a poor quarter that was worse than Wall Street expected. Universal is the leading global leaf tobacco merchant and processes tobacco for cigarettes, cigars and smokeless tobacco products.
Although revenues and profits were down in the most recent quarter, CEO George Freeman III told investors: "Overall, customer orders are in line with our expectations, and based upon the current backlog of shipments, we anticipate that volumes for fiscal year 2015 will not be materially different from those of last year." The stock is trading at just 60% of its Graham Number valuation and 95% of book value. At the current price the stock yields 4.37%.
I am a huge fan of another company that makes the defensive investor list. The Eastern Company (EML) is near the top of my buy in a correction list. The company makes relatively boring products like locks, latches, the hardware that closes school bus doors and tool box locks.
The security segment of the company offers electronic and mechanical locking devices as well as coin acceptors and other coin security products for the commercial laundry markets. Eastern also has a metal products division that makes things like mine roof support anchors, couplers for railroad braking systems, adjustable clamps for construction, and fittings for electrical installations.
The stock trades at 90% of the Graham Number and 1.14x book value right now. The dividend yield is 2.87% at the current price.
I like this company and think it is a fantastic long term defensive stock.
The rest of the current defensive investor portfolio includes Helmerich & Payne (HP), Cameco Corp (CCJ), AVX Corp (AVX), Weiss Markets (WMK), Atlantic Tele-Network (ATNI), Weyco Group (WEYS), Gulf Island Fabrication (GIFI), CSS Industries (CSS) and Oil-Dri Corp of America (ODC).
Graham's Defensive Investor screen has performed well over time and should continue to do so in the future. Although defensive in nature, it actually performs as well as, or even, better than many of the more aggressive stock selection methodologies.
