25 Stocks Benjamin Graham Would Like

Benjamin Graham is widely regarded to be the founder of modern value investing. His greatest student, Warren Buffett, attributes much of his success to Graham’s teachings.

Though Graham believed that much research is necessary and that no stock screening methodology is perfect, he did give us some guidelines on how to perform initial screening techniques to limit the number of investments that should be researched further. The following is a list of the attributes he suggests investors look for first. The italics represent our changes to his methodology based on the current market:

1. Price-to-book (P/B) ratio of less than 1.2 (P/B < 1.5).

Intangible assets such as intellectual property, brand name recognition, and customer base, are not reflected in the price-to-book ratio, so we suggest a P/B of less than 1.5, rather than 1.2 that Graham discusses. He recognized this fact as well and commented that the P/B could be up to 2.5 if the company has significant intangible assets.

2. Earnings per share [EPS] should have grown by 33% in the past 10 years (earnings growth of 3% or more in past 5 years).

Earnings thus should have grown around 3% per year. In this exercise, we go back 5 years, looking for 3%+ growth in earnings.

3. The price-to-earnings [ttm] ratio should be below 15.

Perhaps the most common valuation metric, the price-to-earnings ratio allows us to understand the earnings power of the company compared to its price. A high P/E ratio is common among “growth” stocks who are expecting phenomenal growth, but Graham believed that there is no way to be sure growth will continue at a pace that justifies the high price.

4. The current ratio should be above 1.5 (Quick Ratio > 1.5).

The current ratio represents the current assets divided the current liabilities. This ensures that if the company faces a crisis, they have 50% more assets than liabilities to work with. For this exercise, we are going to use the quick ratio instead, which is a more conservative number because it disregards any current assets that might be difficult to unload in a tight situation, such as inventory.

5. The company should pay out a dividend (>2%).

Dividends, in Graham’s opinion, are a very important indicator of a company’s financial health. Not only that, but they also indicate a shareholder friendly management team. For this screener, we locate stocks that pay out more than 2% annually.

The Results

Now that we have mapped out what Graham thinks makes a good starting point for a list of investments, we will show you the results of running such a screener in today’s market.

The following companies meet or exceed Graham’s initial test and should be considered for review by the intelligent investor.

As always, don’t take these as recommendations, rather as a good place to start researching. Lucky for you, the Investment Advisor Newsletter service we offer performs this research for you, providing analysis on what we believe the best value stock on the market each month.

In the interest of full disclosure, the author of this article does not own shares in any of the companies mentioned.

Comments

[ponchovilla]

Your headline grabbed my attention. You win. But I think these are stocks Ben Graham would screen.. or as you suggest ...should be screened.
First Marblehead FMD jumps off the page just by the numbers and a stock that I knew from the past Starrett SCX looks like something of interest (it's boring but faithful). I believe many "investors" would jump on an article like this. But I am also confident that Ben Graham would ask, for example, is FMD worth $3.62 today and what are the future prospects when the bargain hunting crowd looks at the 52 week high and says why not $42.50 again (next week)

Thanks for the screening opportunity. I'll take monopoly money and buy 100 shares each this morning and then take the equivalent amount and try my efforts to buy a selection from this list using a Ben Graham approach and make a comparison one year from now.

[RichardSchweitzer]

As a student of Graham, Dodd & Baker (actually mostly Dodd) some 60+ years back now, I note the subsequent omissions of considering "cost of capital" impacts.

Under one "theory" that is reflected (in part) indirectly in the P/E ratio, or at least the guess of that cost made by the financial market place is so refelcted.

What about that factor?

[Eric Fox]

Some of these stocks are screening as selling below book value because those assets on the balance sheet have not been written down yet.

[RichardSchweitzer]

Examples: If you look at the list in the article, consider the sources of their capital (hey! look at that of B-H which Buffett regularly explains) and thus at the cost - any wonder at the predominance of insurors, in which the cost of capital consists of supplying the services of spreading risks (actuarially on lives), not taking risks, notably auto insurors are absent (probably due to costs of service provisions?) ?

[atauber]

i think PLFE will be sold soon as the C.E.O. is geting old and will retire in 2009