While I am not yet convinced it's time to back up the truck and I'm still not seeing any names that are stupid cheap at this point, I am certainly looking as I try to develop a bench of potentially cheap names.
Even though the Russell 2000 and Russell Microcap indices are in bear market territory, my deeper-value screens that identify net/nets (companies trading at less than net current asset value, or NCAV) and double nets (those trading at between one and two times NCAV) are still not showing me much.
However, one screen that is starting to show a greater number of candidates is my version of Ben Graham's "Stocks for the Defensive Investor." The methodology for this screen was laid out in Graham's great work "The Intelligent Investor," which was first published in 1949. The screen utilizes the following criteria, which I adapted several years ago from Graham's original.
- 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
Ten names now make the cut, up from just three in early February. Joining Methode Electronics (MEI) , Hooker Furniture (HOOK) and Nucor Corp. (NUE) are Paccar Inc. (PCAR) , Reliance Steel (RS) , MSC Industrial Direct (MSM) , Carpenter Technology (CRS) , Universal Corp. (UVV) , Encore Wire (WIRE) and Miller Industries (MLR) .
Paccar is the largest qualifying name I've seen this search reveal in quite a while and currently trades at 12x next year's consensus estimates (with caveats about consensus estimates in this uncertain time). Currently yielding about 2% based on the regular quarterly dividend, Paccar also has been paying a special dividend each December since 2010. That dividend amounted to $2.30 this past December, and if you include that payout along with the regular dividend Paccar would yield 5.5%.
MSC Industrial Direct, which is new to me, trades at 10.5x next year's consensus estimates and yields 5.6%. That yield does not include the special $5 dividend the company paid in January; it's the first time at least going back several years that the company has paid a special dividend. MSM also has increased its regular quarterly dividend considerably over the past few years, from 45 cents just three years ago to the current 75 cents, which equates to a three-year compound annual growth rate of 18.5%.
While I am not yet a buyer in this tumultuous market, I am turning over a great deal of rocks looking for value.
