It's no secret that I am a big fan of stock screening, which is trial and error at its best when applied to value investing. I screen often, and for years have sought to find the perfect screening criteria. Unfortunately, like Bigfoot, it probably does not exist. Still, that realization has not stopped me from trying to find screens that have the ability to produce solid results over time.
My typical screens set the bar very high, producing few candidates, especially when markets are trending upward and overall market valuations are not exactly cheap.
Over the past year, I've revealed three vintages of a screen that is based on Benjamin Graham's "Stock Selection Criteria for the Defensive Investor," with the following criteria (alterations vs. Graham's original criteria in parentheses)
- Adequate size: 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 price-to-earnings (P/E) of 15 or less in the past three years.
- Moderate ratio of price to assets: The P/E ratio times the price-to-book ratio must be less than 22.5.
- No utilities
Vintage one, which I revealed last November, consisted of four names, Corning (GLW) , Helmerich & Payne (HP) , Joy Global (JOY) and Finish Line (FINL) . That group has done well, and is up about 49%, led by JOY's 86% run. All four names are in positive territory.
Vintage two, from last January, produced a different set of names, Tesco (TESO) , Cummins (CMI) Innophos Holdings (IPHS) , and Waddell & Reed Financial (WDR) . This group has produced slightly better results, up 52%. It was led by IPHS' 130% run. WDR was the only name in negative territory, down 21%.
Vintage three, from late last March, consisted of four new names, Westlake Chemical (WLK) , Dillard's (DDS) , Cooper Tire & Rubber (CTB) Stage Stores (SSI) and one holdover, Waddell & Reed. That group has struggled, and is down 9%, in what has been a solid environment for stocks. Stage Stores has been the worst performer, down 46%.
My last published screening, in August, was a rehash of three names from the last vintage Dillard's, Cooper Tire and Waddell & Reed, and one new name, Cal-Maine Foods (CALM) . Results have been subpar; while the three holdovers are all up, CALM is down about 5%, and the portfolio is up 6% overall.
It's difficult to draw any worthwhile conclusions from recent screenings, with the number of candidates being so small. At best, the results reinforce an earlier notion that I should be skeptical of retailers that appear to be cheap.
Running the screen now reveals just two qualifying names, both holdovers, Cooper Tire and Waddell & Reed. The cupboards are getting quite bare in value land, but that won't stop me from screening.