I don't want to ignore the elephant in the room -- the ever-developing bank failure story. All I can say is that we don't know what we don't know, as idiotic as that may sound.
This story will continue to unfold, and it will bring with it continued market volatility as the true damage is assessed and fallout continues, or does not. I've seen too many situations where a quick conclusion is drawn one way or another (this time it is ranging from President Biden saying all is well with the banking system, to others proclaiming more failures to come), only to be proven drastically wrong.
Meanwhile, the show must go on.
Occasionally, I will modify a value screen in order to potentially broaden the opportunity set. I've found that this is not typically helpful if you are just simply lowering your standards because your patience is wearing thin for new ideas. However, it really depends on what the standards are that you are lowering.
When it comes to Benjamin Graham's "Stocks for the Defensive Investor," my version included altered criteria that was primarily due to changes in the value of the dollar (Graham's version was from 1949). One of the criteria (see below for all of them) was minimum trailing 12-month revenue of $500 million, which I'd changed from Graham's original $100 million. I thought it would be interesting to see what the screen would reveal, if anything, by changing that factor back to $100 million.
That change revealed just a handful of companies, but at the very least, it's an interesting group of very small names.
Monarch Cement (MCEM) , which makes and sells Portland cement, currently trades at about 9x trailing earnings, and garners no analyst coverage. This company has been around since 1908, but is relatively unknown, and has very limited trading volume. This is a very profitable business with net profit margins above 18% for the past three years, including 2021's 28.5%. The company ended its latest quarter with $48 million or about $12/share in net cash, and yields about 2.3%.
Coal and mineral name NACCO Industries (NC) , which is now also in the lithium market, is another small but very profitable company, with annual net profit margins often in the mid-high 20% range. The company ended its latest quarter with $74 million or just over $10/share in net cash. NC currently yields about 2.4%.
The final qualifier is sporting goods, fitness, and recreation equipment company Escalade (ESCA) , which is actually covered by one analyst, and trades at 10x 2023 estimates. Unlike the previous two, ESCA does have net debt, to the tune of $91 million. The company, however, does own six manufacturing and distribution facilities encompassing 1.34 million square feet. Company brands include Onix and Dura in the ever-popular pickleball space. The shares currently yield about 4.7%
Screening criteria:
- Adequate size. A company must have at least between $100 million and $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.
- No utilities or retailers
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider these names be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
