Congratulations to Andy Reid and the Kansas City Chiefs for last night's Super Bowl Victory. The team had not won the big game since Super Bowl IV on January 11, 1970. To put it into some historical financial market perspective, the S&P 500 closed at 92.4 on the Friday prior to that Super Bowl (1/9/1970), and the volume that day was 9.38 million shares. Fast forward just over 50 years to this past Friday, and the S&P closed at 3225.52 on volume of more than 4.5 billion shares. The Index fell 58 points that day, a drop which represented 63% of the January 9, 1970 closing price. The 50 year jump in the S&P from 92 to 3225 seems monumental, but it equates to an average annual gain of 7.35%.
Now that football season is done, comes the purgatory I typically experience between the end of football season and the beginning of baseball season. As a kid in the 1970's, that meant resorting to watching pro bowling on Saturdays. I don't know if they even broadcast that any longer. Or, it just means a little more time to turn over rocks in the pursuit of some value diamonds in the rough.
To that end, after the big game ended last night, I reluctantly ran one of my favorite stock screens based on Benjamin Graham's "stocks for the defensive investor" methodology that he laid out in the Intelligent Investor first published in 1949 (18 years before the first Super Bowl) - reluctantly because it has born little fruit recently, revealing few candidates.
However, there was a new name (to this screen, anyway) that made the cut, Methode Electronics (MEI) , which happened to be a big winner (+61%) in last year's Tax Loss Selling Recovery Portfolio. MEI has had a rough go of it so far in 2020, down 16.5% including a 6.5% drop last Friday, but is trading at 9x next year's consensus estimates.
The other names that make the cut, Hooker Furniture (HOOK) and Nucor (NUE) , have appeared in this screen so often that they may be "perennials", or names that just happen to trade at relatively cheap valuations.
Screening criteria for my version of Graham's "stocks for the defensive investor" are below.
- 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 also must have less long-term debt less 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 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.
- No utilities or retailers
I'll keep screening, and perhaps market volatility will shake out some additional candidates.
