I've often referenced Benjamin Graham's "Stocks for the Defensive Investor," a screen he discussed in his 1949 masterpiece The Intelligent Investor. I did make some alterations, (see my screening criteria, below), one of them being that I excluded retailers.
That was my own particular bias, introduced at a time when retailers were clogging the screen, and the industry was in distress. Well, it is still in distress, but I thought it would be interesting to take a look at the current qualifiers anyway.
Haverty Furniture (HVT) currently trades at 6x 2024 consensus earnings estimates (just two analysts cover it). The company just raised the quarterly dividend 7% to 30 cents/share, which equates to a current 4.7% yield.
HVT shares were enjoying a nice early run in 2023, at least through February (up 27%), but have since given back all of that gain and more (down 13% YTD), likely on recession fears. The company's balance sheet should weather the storm, though; the company ended its latest quarter with $120 million or $7/share in net cash. Haverty has no debt.
Regional supermarket chain Ingles Markets (IMKTA) currently trades at 6x trailing earnings (there is no analyst coverage), and yields 2.3%. The 198-store chain, which primarily operates in North Carolina (75), Georgia (65), South Carolina (35) and Tennessee (21), ended its latest quarter with $250 million in cash and $557 million in debt ($539 million long-term).
While at first glance Ingles' debt could be a concern, keep in mind that the company owns significant real estate assets including 164 store locations, 25 undeveloped sites, as well as a 1.65 million square foot facility on 119 acres near Asheville, NC.
Pennsylvania-concentrated supermarket chain Weis Markets (WMK) currently trades at 14.5x trailing earnings (no analyst coverage), and yields 2.2%. The shares have fallen 24% since the beginning of May, much of which was due to a negative reaction to first-quarter earnings, which showed a decline in profitability year over year.
Weis Markets ended that quarter with $352 million or $13/share in net cash and short-term investments (no debt). The company owns 101 of its 197 locations.
Last (and perhaps least) is Shoe Carnival (SCVL) , which has been no stranger to several of my deep value screens over the years. SCVL currently trades at 5.5x and 5x 2024 and 2025 consensus earnings estimates, respectively.
The company ended its latest quarter with $63 million or $2.32 per share in net cash and short-term investments (no debt) and yields 2%. Unlike IMKTA and WMK, there is no real-estate sweetener here, as the company leases its locations.
My Screening Criteria:
- 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 company must have a current ratio (current assets divided by current liabilities) of at least 2.0. It also must have less long-term debt than working capital.
- Earnings stability. A business must 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 (P/E) 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 value ratio must be less than 22.5.
