Graham Value Stock Portfolio Update

by: Scott's Investments

In January 2012 I announced a new portfolio, a Benjamin Graham "inspired" value stock portfolio. The purpose of the hypothetical portfolio is to track returns for a portfolio of 15 stocks selected based on a variety of valuation metrics.

I originally intended to update the portfolio monthly; however, in the spirit of creating a lower turnover, value-driven portfolio it is now updated less frequently (the most recent update was July 2013). I have also added an additional criteria to limit turnover in the portfolio (see below). The Graham portfolio is an attempt to add a value strategy to Scott's Investments, which is otherwise focused on momentum, trend, income and market timing strategies.

The criteria used to select the stocks are listed below. The tool used to perform the screen and backtests are courtesy of Portfolio123 ("P123″).

The actual screen factors are below:

  • Liquidity filter: No OTC Stocks
  • Market capitalization > $100 million
  • Eliminate companies classified in the Miscellaneous Financial Services Industry, most of which are investment companies and funds and not the kind of stocks this all-star tended to seek
  • Current ratio must be at least 1.5
  • Long-term debt must be no higher than 10% above working capital
  • EPS must be above breakeven in each of the last four quarters and in each of the last five annual periods
  • Trailing 12 month EPS most be above EPS in the latest annual period
  • EPS in the latest annual period must be above EPS in the prior year and five years ago
  • The company must have paid common dividends in the last 12 months

The ranking system used as a basis for selecting the top 15 based among those stocks that pass the Graham screen are below:

  • Valuation - 60% of total
  • Trailing 12 month P/E (15% of this category)
  • Price-to-Book (15% of this category)
  • Price-to-Tangible Book Value (35% of this category)
  • Operating P/E, defined as Market Capitalization divided by Business Income, which is Sales minus Cost of Goods sold minus Selling, General & Administrative Expense and omits unusual items (35% of this category)
  • Earnings - 40% of total
  • 5-year EPS Growth Rate (50% of this category)
  • EPS Stability, defined as the standard deviation of EPS over the past 16 quarters, lower being better (50% of this category)

Stocks will now be sold when they drop below the 75th percentile ranking based on the ranking system above. Improvements in the screening and testing platform (via Portfolio123) allows a change in the sell / turnover rule from previous updates. Prior to this update, stocks were sold when they dropped out of the top 20.

I began tracking this portfolio real-time on January 13th, 2012. As of January 15th, 2014 it is up over 45%. A real-world application of this portfolio could also utilize stop losses in order to prevent large drawdowns in single positions. However, for the purposes of tracking the portfolio results, all positions are bought and held until rebalancing.

Below is a 14+ year backtest results for this screen using a quarterly rebalance and .50% slippage to help account for bid/ask spreads. Backtests include the 75th percentile sell rule (stocks will only be sold when they drop below the 75th percentile ranking):

The stocks being sold are listed below:

Symbol Name Purchase Date Unadjusted Percentage Gain/Loss
WDC Western Digital 1/15/2013 98.44%
MRTN Marten Transport Ltd 4/15/2013 63.65%
NATR Nature's Sunshine Products Inc 4/15/2013 19.52%
RGLD Royal Gold Inc 7/16/2013 15.92%
JOY Joy Global Inc 4/15/2013 7.29%
CUB Cubic Corp 4/15/2013 27.43%
GOLD Randgold Resources Ltd 7/16/2013 -9.75%
AAPL Apple Inc 4/15/2013 32.75%

The current portfolio is listed below. There is a higher amount of turnover due in part to the 6 month lag between rebalancing (the historical average has been 104% turnover annually):

Symbol Name Purchase Date Unadjusted Percentage Gain/Loss
AGU Agrium 1/15/2014 0.00%
AGI Alamos Gold Inc 4/15/2013 20.79%
HFC HollyFrontier Corp 4/15/2013 5.12%
CHRM Charm Communications 1/15/2014 0.00%
CVI CVR Energy 1/15/2014 0.00%
HP Helmerich & Payne Inc. 7/17/2012 91.35%
CVX Chevron 1/15/2014 0.00%
HUM Humana 1/15/2014 0.00%
JST Jinpan International 1/15/2014 0.00%
SWM Schweitzer-Mauduit Intl Inc 10/15/2012 40.08%
WMK Weis Markets Inc. 1/15/2013 34.58%
RCKY Rocky Brands 1/15/2014 0.00%
SCVL Shoe Carnival Inc. 1/15/2014 0.00%
TESS TESSCO Technologies Inc 7/17/2012 87.74%
CF CF Industries Holdings Inc 1/15/2013 14.48%

Disclosure: No positions