It's been hit or miss lately with one of my favorite deep value techniques, based on Benjamin Graham's "stocks for the defensive investor" methodology laid in The Intelligent Investor. The last name the screen revealed, Hooker Furniture (HOFT) , is up about 13% since that column ran, but that is not much better than the Russell Microcap Index (+12.5%), an appropriate benchmark in this case.
In October, the screen turned up Methode Electronics (MEI) , which is down 7% since, certainly not setting the world on fire, but fairly close to performance of the Russell 2000 (-6%). Finally, in early September, the screen revealed Newell Brands (NWL) , which has been a disaster performance-wise (-27% while the S&P Mid Cap 400 Index is down about 9%) as it tries to right-size, sell businesses and pay down debt, and Federated Investors (FII) (+28%), the best of the bunch.
Running the screen this weekend revealed three names, including HOFT, which still meets the rather stringent screening criteria, and a couple of newcomers, both steel companies. Reliance Steel & Aluminum (RS) , which is already enjoying a solid run year-to-date (+23%), trades for about 10x consensus 2019 earnings estimates, and yields 2.5%. The company recently increased the quarterly dividend 10% to 55 cents/share
The larger Nucor (NUE) is also doing fairly well so far in 2019 (+14%). Currently trading at about 9.5x 2019 consensus estimates, NUE yields 2.7%, and recently upped the quarterly dividend 5.2% to 40 cents.
It's still very slim pickings in deep value land, for sure, which makes the digging a bit harder, but that's been the case for quite a while.
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 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.
