It does not take much to get this value investor excited these days; with the value cupboards so bare, anytime I can find even a potentially interesting name, the heart beats a little faster.
Early last month, my Graham Defensive Screen identified two candidates, the struggling Newell Brands (NWL) , and Federated Investors (FII) . The former has fallen another 16% since that column ran, including the 'no news' big volume day of Friday when shares fell 6%. NWL now yields 4.9%. FII is up 8%; however one month to a normal investor is but a day to a value investor.
By way of reminder, the criteria I use for this screen, which are modified from Ben Graham's original screen, are as follows:
- 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 or retailers.
So I was excited this weekend to identify a third candidate, Methode Electronics (MEI) , which is a new name to me. Shares are down about 28% over the past year, and 19% over the past month, which is why the company qualifies - falling prices are usually the catalyst for companies to qualify for deep value screens. That being said, that alone does not make them worthy of purchase given, among other things, the fact that fundamental data can be stale.
MEI ended its latest quarter with $229 million or just over $6 per share in cash, and just $53 million in debt. It currently yields just 1.37%, but raised the dividend 22% to 11 cents/quarter in early 2018. Just two analysts currently cover the name, making it somewhat under-followed, which can make such situations more interesting. "Consensus" estimates are calling for earnings per share of $3.56 next year, which pegs the forward price earnings ratio at 9.
While there's been little news on MEI, the company's August 20th announcement that it would acquire Grakon Parent for $420 million (which was completed on September 12th), may be weighing on the stock. It's a relatively large deal for a company with a $1.2 billion market cap.
I intend to do a deeper dive on MEI, and will reserve judgment for now.