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Follows Benjamin Graham method, deep value, value, long only
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The bears are active even though the bulls seem to be ruling this market. The following screen is the basis of the Low PE Portfolio. I complete this screen once a month. The screen is of the valuation database’s 140 companies with the lowest price to normalized earnings ratio that are suitable for the enterprising investor. Later Wednesday I will have another post that includes the monthly update for the portfolio.

This screen targets the lowest price to earnings ratios out of the companies I follow on Modern Graham that pass the tests for the enterprising investor, updated from Benjamin Graham’s tests presented in The Intelligent Investor.

The normalized earnings used for the screen are based on a five year weighted average of the company’s earnings per share.

Specifically, here are the tests required for the enterprising investor:

Enterprising Investor – must pass at least 4 of the following 5 tests:

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1
  3. Earnings Stability – positive earnings per share for at least 5 years
  4. Dividend Record – currently pays a dividend
  5. Earnings growth – EPSmg greater than 5 years ago

Additionally, a company can qualify for the enterprising investor if it passes the tests for the defensive investor.

This month, the screen produced the following companies. Please note that any investment research only begins with a screen. Each of these companies should be subject to much more in depth research.

  • EV Energy Partners (EVEP) (PE is 6.04) – EV Energy Partners is a limited partnership engaged in exploration, development, and production of oil and natural gas properties. The company does not pass the tests set forth for the defensive investor, but passes four of the five tests for the enterprising investor, failing only on the second part of the financial condition. I estimate the company’s earnings per share in 2009 will be $0.68, a considerable drop from the $11.14 achieved in 2008. However, the normalized earnings per share will remain at around $4.28, leading to a very intriguing PE ratio.
  • Tidewater Inc (TDW) (PE is 7.37) – Tidewater Inc provides offshore supply vessels and marine support services to the offshore energy industry. The company passes the tests for both the defensive and enterprising investors with flying colors. I estimate the company’s earnings per share in 2009 will be $4.81, lower than the $7.89 seen in 2008. The normalized earnings per share should remain strong at $6.10.
  • Allegheny Technologies Inc (ATI) (PE is 8.66) – Allegheny Technologies is a diversified metals producer. The company passes all of the tests for both types of investors except the tests related to earnings stability. I estimate the company will see a negative net income of -$0.07 in 2009. However, the normalized earnings per share should be $3.93.
  • Chubb Corp (CB) (PE is 9.25) – Chubb Corp is a holding company for a group of insurance companies. The company is suitable for the defensive investor and hence the enterprising investor as well. I estimate earnings per share in 2009 will be $4.83, and normalized earnings per share will be $5.42.
  • International Shipholding Corp (ISH) (PE is 9.49) – International Shipholding Corp provides maritime transportation through charters. The company is suitable for the enterprising investor but not the defensive investor due to a lack of a steady dividend and earnings stability. I estimate earnings per share in 2009 will be $4.97 and normalized earnings per share will be $3.50. Both figures are increases from last year.
  • UnitedHealth Group (UNH) (PE is 9.99) – UnitedHealth Group is a diversified health and well-being company. The company is suitable for the enterprising investor through passing the tests for the defensive investor. I estimate earnings per share in 2009 will be $2.98 and normalized earnings per share will be $2.87, both increases over last year.
  • Baker Hughes Inc (BHI) (PE is 10.19) – Baker Hughes supplies various services to oilfields. The company passes every test for both the defensive and enterprising investors. I estimate earnings per share in 2009 will be $1.52, a significant decrease from the 2008 figure of $5.30. However, normalized earnings per share will be $4.00 (decreasing from 2008’s $4.92).
  • Garmin Ltd (GRMN) (PE is 10.45) – Garmin is a producer of navigational devices through the use of global positioning technology. The company passes every test for each type of investor except the dividend history test for the defensive investor. I estimate earnings per share in 2009 will be $2.25, the lowest figure since 2005. However, normalized earnings will remain high at $2.86.
  • Psychemedics Corp (PMD) (PE is 10.60) – Psychemedics Corp provides substance abuse testing services. The company passes all of the tests for the enterprising investor. I estimate earnings per share in 2009 will be $0.24, the lowest figure since 2002. However, normalized earnings per share will be $0.58.
  • Xerox Corp (XRX) (PE is 10.69) – Xerox is highly involved in the document production and reproduction industry. The company passes four of the five tests for the enterprising investor, but only three of the seven for the defensive investor. I estimate earnings per share in 2009 will be $0.56 and normalized earnings per share will be $0.72.

Disclosure: At time of publication, author was long TDW and GRMN. See a list of the author’s current holdings.

Source: Ten Low PE Companies for the Enterprising Investor