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In January 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. The portfolio is re-balanced monthly, however, a quarterly or longer timeframe could be used as the rebalance point for those looking to lessen turnover. I may also look to add an additional screening criteria in order to limit turnover in future months.

The criteria used to select the stocks are listed below. The tool used to perform the screen and backtests is Stockscreen123 (“SS123”) and Portfolio123 (“P123″).

The actual screen factors are below:

  • Liquidity filter: No OTC Stocks
  • 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)

I began tracking this portfolio real-time on January 13th, 2012. As of this writing, the portfolio is up over 4% but has suffered this past month due in part to its position in RadioShack (NYSE:RSH) which is down over 33% since January 13th. A real-world application of this portfolio could utilize stop losses in order to prevent such large drawdowns in single positions.

The current positions are listed below, along with the 5 positions being sold from last month. New positions are italicized and current positions are in bold:

Ticker Name SS123 Rank
AVX AVX Corporation 96.22
JCS Communications Systems, Inc. 94.35
SVT Servotronics, Inc. 93.42
CVX Chevron Corporation 92.91
EEI Ecology and Environment 92.8
ALG Alamo Group, Inc. 92.74
NHC National HealthCare Corporation 92.12
PAAS Pan American Silver Corp. (USA) 91.12
PLPC Preformed Line Products Company 90.55
HUM Humana Inc. 90.48
SCL Stepan Company 88.92
KYO Kyocera Corporation (ADR) 87.93
MANT Mantech International Corp 87.81
HFC HollyFrontier Corp 87.58
FRD Friedman Industries 86.57

Below is the list of 5 stocks sold:

Sell Name
GES Guess?, Inc.
DO Diamond Offshore Drilling, Inc.
SGC Superior Uniform Group, Inc.
RSH RadioShack Corporation
SEB Seaboard Corporation
Disclosure: No current positions in stocks mentioned.

Source: Benjamin Graham Value Portfolio for March