As we put 2022 out of its misery, I am reflecting back on what worked and what did not this year. There was plenty that did not.
One area that was modestly successful was a screen I've used for years based on Benjamin Graham's "Stocks for the Defensive Investor," which he laid out in his 1949 masterpiece The Intelligent Investor. I've made some modifications to that screen-for one reason due to inflation -- but 73 years later, the principles remain sound:
- 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
When I ran that screen in May, 10 names made the cut. Since then (not counting dividends) that group, which included Intel (INTC) , Winnebago (WGO) , Johnson Outdoors (JOUT) , Reliance Steel & Aluminum (RS) , Commercial Metals (CMC) , Encore Wire (WIRE) , Preformed Line Products (PLPC) , Superior Group of Companies (SGC) , Mueller Industries (MLI) , and Amcom Distributing (DIT) are up an average of 4.5% (not including dividends) -- ahead of the S&P 500 (down 2.8%) and Russell 2000 (up 1.8%). A narrow victory, for sure. Interestingly, INTC (down 39%) was the worst performer.
I ran that screen again in July, and the original 10 from May remained qualifiers, and were joined by Sturm, Ruger & Co. (RGR) , Evercore Inc. (EVR) and Nucor Corp. (NUE) . Since that screen ran, the 13 names are up an average of 3.3%, better than the S&P 500 (down 3.5%) and Russell 2000 (down 3.9%). Again, not a rousing victory but decent.
Running the same screen Friday morning reveals 15 names-that may be the most I've seen in the umpteen years I've been running this screen. Newbies include Huntsman (HUN) , Korn Ferry (KFY) , Worthington Industries (WOR) , Standard Motor Products (SMP) , and Insteel Industries (IIN) . INTC, RS, and SGC have fallen off.
I will re-run the screen at year-end, and track the qualifiers for a full-year, through 2023.
