Watchlist Wednesday: Defensive Investor

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Includes: HP, RL
by: Mitchell Mauer

In this edition of Watchlist Wednesday, we highlight two of the top stocks qualifying for the Defensive Investor screen.

This screen was made popular by Benjamin Graham in his book, The Intelligent Investor.

Description

According to Graham, a defensive investor buys from a "diversified list of leading common stocks" and ensures that the price paid is "not unduly high as judged by applicable standards."

The screen finds stocks with "a minimum of quality in the past performance and current financial position of the company, and a minimum of quantity in terms of earnings and assets per dollar of price."

Core Criteria

The five qualifying characteristics a Defensive Investor stock must have in order to be considered for purchase are: adequate size, financial stability, consistent profitability, uninterrupted dividends, and increased earnings.

  • Market Cap > $2 Billion
  • Current Ratio > 2 AND Working Capital > Long-Term Debt
  • Positive EPS Streak ≥ 10 Years
  • Dividends Paid Streak ≥ 10 Years
  • 5-Year Net Income CAGR ≥ 3%

Valuation Factors

For this screen, Graham's "applicable standards" are determined based on a stock's price in relation to its earnings and the book value of the company.

  • 3-Year Average EPS * 15
  • Book Value * 1.5
  • Average Both Valuation Factors

Here is a breakdown of two stocks with the lowest price to intrinsic value as found on The Stock Market Blueprint:

  • Helmerich & Payne (NYSE:HP) - Helmerich & Payne, Inc. engages in the contract drilling of oil and gas wells. It provides drilling rigs, equipment, personnel, and camps on a contract basis to explore for and develop oil and gas from onshore areas and from fixed platforms, tension-leg platforms, and spars in offshore areas. The company operates through three segments: U.S. Land, Offshore, and International Land. The company also owns, develops, and operates commercial real estate properties; and researches and develops rotary steerable technology. Helmerich & Payne, Inc. was founded in 1920 and is headquartered in Tulsa, Oklahoma.
    • Market Cap: $6.5 Billion
    • Current Ratio (MRQ): 3.6
    • Working Capital - Long-Term Debt = $575 Million
    • Positive Earnings Streak: 10+ Years
    • Dividends Paid Streak: 10+ Years
    • Net Income % Growth, 5-Year CAGR: 22%
    • Current Price: $63.06/share (closing price on 4/19/16)
    • Intrinsic Value: $76.22/share
    • Price/Intrinsic Value: 82.7%
  • Polo Ralph Lauren Corporation (NYSE:RL) - Polo Ralph Lauren Corporation designs, markets, and distributes lifestyle products worldwide. The company operates in three segments: Wholesale, Retail, and Licensing. It offers apparel, luggage, and fragrances. Ralph Lauren Corporation sells its products to department stores, specialty stores, and golf and pro shops, as well as through its retail stores, concession-based shop-within-shops, and its e-commerce sites. The company also sells its apparel, home, and other products through licensing alliances. As of March 28, 2015, it operated 466 directly-operated freestanding stores, 536 concession-based shop-within-shops, and 10 e-commerce Websites. The company was founded in 1967 and is based in New York, New York.
    • Market Cap: $8.1 Billion
    • Current Ratio (MRQ): 2.8
    • Working Capital - Long-Term Debt = $1.6 Billion
    • Positive Earnings Streak: 10+ Years
    • Dividends Paid Streak: 10+ Years
    • Net Income % Growth, 5-Year CAGR: 7.9%
    • Current Price: $94.81/share (closing price on 4/19/16)
    • Intrinsic Value: $95.49/share
    • Price/Intrinsic Value: 99.3%

Implementation

Benjamin Graham stated that a defensive investor strategy should entail "adequate though not excessive diversification." He goes on to say this would mean a minimum of 10 stocks and a maximum of 30.

This can be accomplished by periodically investing equal amounts in the qualifying stock with the lowest price in relation to intrinsic value.