I was pleased to see a couple new candidates revealed by one of my favorite deep-value techniques that are based on Benjamin Graham's "stocks for the defensive investor" methodology laid in "The Intelligent Investor."
Last month the screen identified two qualifiers, Reliance Steel & Aluminum Co. (RS) and Nucor Corp. (NUE) . The two new kids on the block just a month later are smaller names -- towing and recovery equipment name Miller Industries Inc. (MLR) and diversified services name VSE Corp. (VSEC) . Neither currently garners any analyst coverage, so there are no consensus estimates
Miller Industries trades at just under 11x trailing earnings and yields 2.3%. It very quietly has put together a nice run and is up about 23% over the last 12 months. The balance sheet is pretty clean for a manufacturing company, and it ended the year with $27 million, or about $2.37 per share, in cash and just $16 million in debt. You've likely seen the company's wreckers or car carriers on the road at some point, but most (present company included) may not be all that familiar with the company.
VSE Corp., which operates in three business segments -- Supply Chain management, Aviation, and Federal Services -- has had a rough run of late and its shares are down about 35% since last April. Sales dropped more than 8% in 2018, with more than 78% of revenue from government sources that include the Department of Defense and the U.S. Postal Service -- a potential red flag, at least from my perspective.
Trading at 10x trailing earnings, VSEC yields 1%, but it has doubled the dividend over the past six years. The company ended 2018 with little cash on the books-- par for the course with this name-- and $180 million in debt.
Although both of these new names have market caps of less than $400 million, it is somewhat surprising that there is no analyst coverage.
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