Legendary market guru Ben Graham passed away in 1976 when I just was 10 years old (and perhaps before some RealMoney readers were even born), but his investment philosophies live on -- and still have relevance today.
I still use a stock screen based on his "Stock Selection Criteria for the Defensive Investor," which you can read about in Graham's classic book The Intelligent Investor.
Here are the criteria used for my version of the screen, which diverges from Graham's in some respects because of data limitations or changes in the U.S. dollar's value since 1973:
- 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.
Not surprisingly, the above screen's results are very thin these days, with just four qualifying names:
Retailer Finish Line (FINL) seems to be the only stock I've ever seen that both meets all of the above criteria and was a "net/net" (trading below net current asset value).
In fact, FINL was an original constituent of my Cheap Stocks 21 Net/Net Index when I rolled the indicator out in early 2008 -- and over the six years that followed, it achieved 10-bagger status. However, the stock has been beaten up this year on lackluster results, and shares are down about 46% since August.
Still, FINL has a good-looking balance sheet, with $100 million in cash and no debt. It also trades at about 1.27x tangible book value, 8x next year's consensus earnings estimates and yields 2.2%. But while those numbers look decent overall, I have to admit that I'm just not a big fan of retail.
Industrial giant Corning (GLW) also makes the "Graham cut."
Currently trading at 1.21x tangible book value, GLW has just over $5 billion in cash and short-term investments, or $4.25 per share. Corning also continues to buy back shares, having reduced its share count by more than 14% since 2013's end. Management even recently increased its buyback program by $4 billion.
While some pundits aren't buyback fans, I like such moves with Corning -- especially in tandem with the company's increasing dividend. Corning has raised its dividend at a 19% clip (CAGR) over the past five years. The company also recently announced plans to increase the dividend 10% per year through 2019.
Helmerich & Payne and Joy Global
Rounding out the list are contract driller Helmerich & Payne (HP) and mining-equipment maker Joy Global (JOY).
HP has had a very rough time over the past 18 months due to oil's plight, while JOY has had and even worse run.
The Bottom Line
I'll continue to monitor this mini-portfolio of the good, the bad and the ugly.