It's time to take another look at a stock screen I utilize based on Benjamin Graham's "Stocks for the Defensive Investor," a methodology laid out in Graham's 1949 masterpiece "The Intelligent Investor." The criteria I've used for years have been modified from Graham's, but the principles behind the search are the same:
- 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.
- No utilities or retailers
The last time I ran this screen, in March 2020, near the Covid market bottom (of the S&P 500, that is), there were 10 qualifiers, the most since I've been using this technique. That group is up about 32% since, a decent absolute return, but not as good as the S&P 500 (up 36%) and well below the Russell 2000 (up 71% -- yes, you read that right).
The current crop is just three names: Commercial Metals (CMC) , Methode Electronics (MEI) and Standard Motor Products (SMP) .
Commercial Metals, which manufactures steel and metal products, trades at 11x next year's consensus estimates and yields 2.1%. CMC share are up 11% year to date.
Method Electronics, which made the list last March and has occasionally appeared in other value-related searches I utilize, trades at 12x next year's consensus estimates and yields 1.2%. MEI shares are flat year to date.
Standard Motor Products, which manufactures auto replacement parts, trades at 13xnext year's estimates and yields 2.5%. This name last graced one of my columns nearly four years ago, among a group of small cap dividend growers. Indeed, SMP has continued to increase its dividend at a 7% CAGR (compound annual growth rate) over the past four years. The 10-year growth rate is an even more impressive 13.6%.
Unfortunately, slim pickings here, and no must-haves for me at this point, but I will continue to turn over rocks, looking for that diamond in the rough.
