Seeking Alpha

Serenity

 
View as an RSS Feed
View Serenity's Comments BY TICKER:
Latest comments  |  Highest rated
  • ModernGraham Quarterly Valuation Of Celgene Corporation [View article]
    Intrinsic Value = EPS x (8.5 + 2xGrowth)

    The ModernGraham website lists this formula as one of the evaluation methods it uses.

    Benjamin Graham gave the following warnings about this formula:
    1. "Warning: This material is supplied for illustrative purposes only".
    2. "Let the reader not be misled into thinking that such projections have any high degree of reliability".
    3. "Note that we do not suggest that this formula gives the “true value” of a growth stock".

    Graham only mentions this formula to demonstrate why such oversimplified growth estimates are unreliable. This formula is popular only due to a printing omission in recent editions of The Intelligent Investor.

    Article 1: http://seekingalpha.co... discusses the issue in detail.

    Warren Buffett once wrote an article explaining how Benjamin Graham's principles are everlasting, their results irrefutable, and his students consistently exceptional. It's called "The Superinvestors of Graham-and-Doddsville".

    But most of what Graham actually taught has been forgotten today, and things he warned against are often attributed to him instead. The above formula is just one example.

    Even when Graham's recommended methods are used, they are heavily modified - often beyond recognition - to clear the stocks, rather than having stocks clear them.

    For example:
    "Adequate Size of Enterprise - market capitalization of at least $2 billion."

    Graham actually recommended "Not less than $100 million of annual sales" for this criterion. Checking for market capitalization instead will - all other things being equal - rate overvalued stocks higher than undervalued ones.

    Even the other rules mentioned here - such as dividend record, and PE & PB ratios - are all very different from what Graham actually recommended.

    Given below are the actual Graham ratings for Celgene Corp (CELG).

    Defensive Graham investment requires all the ratings to be at least 100%.
    Enterprising Graham investment requires the ratings to be at least - N/A, 75%, 90%, 50%, 5%, N/A and 137%.

    Celgene Corp - Defensive Graham Ratings
    Sales | Size (100% ⇒ $500 Million): 1,298.00%
    Current Assets ÷ [2 x Current Liabilities]: 194.05%
    Net Current Assets ÷ Long Term Debt: 133.56%
    Earnings Stability (100% ⇒ 10 Years): 50.00%
    Dividend Record (100% ⇒ 20 Years): 0.00%
    Earnings Growth (100% ⇒ 30% Growth): 1,401.21%
    Graham Number ÷ Previous Close: 26.00%

    Graham recommended various categories of stocks - Index, Defensive, Enterprising and NCAV. He emphasized that the secret of sound investment was the "Margin of Safety", and specified precise qualitative and quantitative rules for each category.

    Article 2: http://seekingalpha.co... explains how anyone can do a true 17-point Benjamin Graham assessment for 5000+ NYSE and NASDAQ stocks; with no adjustments other than those for inflation.
    Nov 14, 2014. 01:13 PM | 2 Likes Like |Link to Comment
  • 5 More Undervalued Companies With High Betas For Intelligent Investors [View article]
    Intrinsic Value = EPS x (8.5 + 2xGrowth)

    Benjamin Graham actually gave several warnings about this formula and only used it to show why such oversimplified growth estimates are unreliable. This formula is popular only due to a printing omission in recent editions of The Intelligent Investor.

    Article 1: http://seekingalpha.co... discusses the issue in detail.

    Warren Buffett once wrote an article explaining how Benjamin Graham's principles are everlasting, their results irrefutable, and his followers consistently exceptional. It's called "The Superinvestors of Graham-and-Doddsville".

    But most of what Graham actually taught has been forgotten today, and things he warned against are often attributed to him instead.
    The above formula is just one example.

    Even when Graham's recommended methods are used, they are often heavily modified to fit the stocks, rather than having stocks meet them.

    For example:
    "Adequate Size of Enterprise - market capitalization of at least $2 billion."

    Graham actually recommended "Not less than $100 million of annual sales" for ensuring adequate size of a company for Defensive investment. Checking for market capitalization instead of sales will - all other things being equal - rate overvalued stocks better than undervalued ones.

    Even the other rules mentioned here - such as dividend requirements, and PE & PB ratios - are all very different from what Graham actually recommended.

    For example, given below are the actual Graham ratings for Fossil Group Inc (FOSL).

    Defensive Graham investment requires all the ratings to be at least 100%.
    Enterprising Graham investment requires the ratings to be at least - CA/2CL : 75%, NCA/LTD : 90%, EPS Stability: 50%, Div Record: 5% and GN/PC: 137%.

    Fossil Group Inc - Defensive Graham Ratings
    Sales | Size (100% ⇒ $500 Million): 652.00%
    Current Assets ÷ [2 x Current Liabilities]: 150.39%
    Net Current Assets ÷ Long Term Debt: 199.64%
    Earnings Stability (100% ⇒ 10 Years): 100.00%
    Dividend Record (100% ⇒ 20 Years): 0.00%
    Earnings Growth (100% ⇒ 30% Growth): 378.09%
    Graham Number ÷ Previous Close: 50.08%

    The Final Graham Assessment for Fossil Group Inc is also given below.
    The Quantitative Result (Graham Price ÷ Previous Close) for a stock has to be 100% for true Graham investment.

    Fossil Group Inc - Final Graham Assessment
    Defensive Price (Graham Number): $48.92
    Enterprising Price (Serenity Number): $32.87
    NCAV Price: $5.81
    Qualitative Result: Bargain / NCAV
    Graham Price: $5.81
    Previous Close: $97.68
    Quantitative Result: 5.95%

    Graham recommended various categories of stocks - Index, Defensive, Enterprising and NCAV. He emphasized that the secret of sound investment was the "Margin of Safety", and specified precise qualitative and quantitative rules for each category.

    He also spent nearly 50 years developing and backtesting the 17 rules in his investment framework; a framework that has been repeatedly endorsed by some of the world's most successful investors.

    Article 2: http://seekingalpha.co... shows how to do an actual 17-point Benjamin Graham assessment for 5000+ NYSE and NASDAQ stocks; with no modifications other than adjustments for inflation.
    Oct 5, 2014. 05:14 PM | 2 Likes Like |Link to Comment
  • 5 Companies For Defensive Investors With Low PE Ratios [View article]
    Dear Readers,

    Graham gives the following warnings with this formula:
    1. "Warning: This material is supplied for illustrative purposes only".
    2. "Let the reader not be misled into thinking that such projections have any high degree of reliability".
    3. "Note that we do not suggest that this formula gives the “true value” of a growth stock".

    On the other hand, he distinctly recommends the methods in the unmistakably named "Stock Selection" chapters.

    The two articles mentioned in the first comment have references, page numbers and scans of the relevant pages.

    Thank you.
    Aug 30, 2014. 10:16 PM | 2 Likes Like |Link to Comment
  • Determining Gilead's Fair Value [View article]
    Thank you, somedata1.

    Again, cigar butt stocks only refer to the simplistic NCAV or Net-Net stocks.
    Graham's more important stock recommendations are often ignored.

    Buffett himself wrote an article called "The Superinvestors of Graham-and-Doddsville" describing how Graham's principles are unquestionable and timeless.

    But most of what Graham actually taught is no longer used today, and what he warned against is attributed to him instead. The above formula is a classic example.
    Aug 22, 2014. 02:59 PM | 2 Likes Like |Link to Comment
  • Determining Gilead's Fair Value [View article]
    Intrinsic Value = Earnings x (8.5 + 2 x Growth)
    Or, V = EPS x (8.5 + 2xG)

    Benjamin Graham actually warned against this formula and only used it to show why such oversimplified estimations are unreliable. This formula is popular only due to a printing omission in recent editions of The Intelligent Investor.

    Article 1: http://seekingalpha.co... discusses the issue in detail.

    Benjamin Graham actually recommended different categories of stocks - Index, Defensive, Enterprising and NCAV - with different qualitative and quantitative criteria for each category.

    For example, given below are the actual Graham ratings for Gilead Sciences Inc (NASDAQ:GILD).

    Gilead Sciences Inc - Defensive Graham Ratings
    Sales | Size (100% ⇒ $500 Million): 2,240.00%
    Current Assets ÷ [2 x Current Liabilities]: 57.50%
    Net Current Assets ÷ Long Term Debt: 24.08%
    Earnings Stability (100% ⇒ 10 Years): 70.00%
    Dividend Record (100% ⇒ 20 Years): 0.00%
    Earnings Growth (100% ⇒ 30% Growth): 607.35%
    Graham Number ÷ Previous Close: 18.48%

    Defensive Graham investment requires that all ratings be at least 100%.
    Enterprising Graham investment requires that the ratings be at least - CA/2CL > 75%, NCA/LTD > 90%, EPS Stability > 50%, Div Record > 5% and GN/PC > 137%.

    Article 2: http://seekingalpha.co... discusses Graham's actual investment strategies and shows how to apply his seventeen stock selection criteria to 5000 NYSE & NASDAQ stocks today.
    Aug 21, 2014. 09:22 AM | 2 Likes Like |Link to Comment
  • 5 Undervalued Companies For Enterprising Investors With High Dividend Yields [View article]
    Intrinsic Value = Earnings x (8.5 + 2 x growth)

    If these valuations are based on the above formula as the ModernGraham website says, Graham actually warned against this formula and only used it to show why such oversimplified growth formulas are unreliable. This formula is popular only due to a printing omission in recent editions of The Intelligent Investor.

    Article 1: http://seekingalpha.co... discusses the issue in detail.

    Benjamin Graham actually recommended three different categories of stocks - Defensive, Enterprising and NCAV - with 17 different qualitative and quantitative criteria for finding them.

    For example, given below are the actual Graham ratings for KLA-Tencor Corp (NASDAQ:KLAC)

    Defensive Graham investment requires all the ratings to be at least 100%.
    Enterprising Graham investment requires the ratings to be at least - CA/CL : 75%, CA/LTD : 90%, EPS Stability: 50%, Div Record: 5% and GN/Price: 137%.

    KLA-Tencor Corp - Defensive Graham Ratings
    Sales | Size: 568.00%
    Current Assets / Current Liabilities: 252.55%
    Current Assets / Long Term Debt: 466.95%
    Earnings Stability: 40.00%
    Dividend Record: 45.00%
    Earnings Growth: 170.82%
    Graham Number / Current Price: 53.62%

    The Final Graham Assessment for KLA-Tencor Corp is also given below.
    The Quantitative Result for a stock has to be 100% for true Graham investment (Quantitative Result = Graham Price ÷ Previous Close).

    KLA-Tencor Corp - Final Graham Assessment
    Defensive Price (Graham Number): $38.55
    Enterprising Price (Serenity Number): $28.15
    NCAV Price: $15.39
    Qualitative Result: OK / NCAV
    Graham Price: $15.39
    Previous Close: $71.89
    Quantitative Result: 21.41%

    Article 2: http://seekingalpha.co... discusses Graham's actual 17 stock selection criteria and shows how to apply them to 5000 NYSE & NASDAQ stocks today, with adjustments for inflation.
    Jul 31, 2014. 07:52 AM | 2 Likes Like |Link to Comment
  • Investing For Beginners With Benjamin Graham [View article]
    Thank you for your insightful comments, drhay53.

    The discussion on the Graham selling strategy should be useful to other readers too.
    Jul 3, 2014. 10:10 PM | 2 Likes Like |Link to Comment
  • Investing For Beginners With Benjamin Graham [View article]
    You're right, drhay53.
    Also, what if the stock were selling at half of Graham's recommended price in the first place? It could advance 90% and still be a good investment.

    There is no reference to any such rule in The Intelligent Investor, or any of Graham's interviews. Please be advised that many such misconceptions are often wrongly attributed to Graham. Here's another example - http://seekingalpha.co...

    Here are Graham's actual notes on selling:

    "the only principle of timing that has ever worked well consistently is to buy common stocks at such times as they are cheap by analysis, and to sell them at such times as they are dear, or at least no longer cheap, by analysis."
    - Lecture Number Ten, The Rediscovered Benjamin Graham Lectures

    "buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies."
    - The Investor and Market Fluctuations, The Intelligent Investor

    "even defensive portfolios should be changed from time to time, especially if the securities purchased have an apparently excessive advance and can be replaced by issues much more reasonably priced"
    - Stock Selection for the Defensive Investor, The Intelligent Investor

    And here is an important addendum:

    "The intelligent investor must carefully evaluate the costs of trading and taxes before attempting to take advantage of any price discrepancy—and should never count on being able to sell for the exact price currently quoted in the market."
    - Things to Consider About Per-Share Earnings, The Intelligent Investor

    There are numerous such references and the underlying principle in all of them is consistent. The investor is to run the numbers for the Graham portfolio every year, and replace any stock that no longer clears the Graham criteria - either due to price appreciation or company deterioration - with a new stock that does.

    If the Graham numbers were run rigorously earlier, the latter scenario - company deterioration - should be unlikely. Graham's Margin of Safety requirements are very thorough. That's why it's so difficult to find stocks that meet them in the first place.
    Jul 3, 2014. 10:21 AM | 2 Likes Like |Link to Comment
  • How To Invest In A Deep Value Investment Opportunity In 3 Easy Steps: Load Caza Oil & Gas, Sit, And Wait [View article]
    Not to contradict anyone, but here are the Defensive Graham ratings for CAZFF again.

    Sales | Size: 1.66%
    Current Assets / Current Liabilities: 72.35%
    Current Assets / Long Term Debt: 21.19%
    Earnings Stability: 0.00%
    Dividend Record: 0.00%
    Earnings Growth: 0.00%
    Graham Number / Current Price: 0.00%

    Defensive Graham investment requires all the ratings to be at least 100%.
    Enterprising Graham investment requires the ratings to be at least - CA/CL : 75%, CA/LTD : 90%, EPS Stability: 50%, Div Record: 5% and GN/Price: 137%.

    Benjamin Graham was the founder of Value Investing, as mentioned in the original article. So it is important to note that - qualitatively or quantitatively - CAZFF is far from a recommended value investment as seen by Graham's methods.
    Jul 2, 2014. 09:55 AM | 2 Likes Like |Link to Comment
  • Waste Management, Inc. Dividend Stock Analysis [View article]
    Benjamin Graham actually recommended 3 different types of stocks for investment - Defensive, Enterprising and NCAV - and 16 criteria for finding them.

    Given below are each of the individual ratings for Graham's Defensive criteria for Waste Management Inc (WM):
    (a rating above 100% indicates that the stock clears that criteria).

    Sales: 2,730.00%
    Assets / Liabilities: 39.89%
    Assets / Debt: 0.00%
    Earnings Stability: 100.00%
    Dividend Record: 80.00%
    Earnings Growth: 82.76%
    Graham Number / Price: 0.00%

    Thus, Waste Management Inc only clears the Defensive criteria for Sales and Earnings Stability, and the final Graham result for Waste Management Inc is:

    Defensive Price (Graham Number): $0.00
    Enterprising Price: -$0.86
    NCAV Price: -$30.85
    Graham Grade: Ungraded
    Graham Price: $0.00
    Current Price: $44.34
    Graham Result: Overvalued

    To See How To Build A Complete Benjamin Graham Portfolio: http://seekingalpha.co...
    Dec 6, 2013. 06:37 AM | 2 Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    LTCM had to close doors because the data they used for their mathematical models went back only 5 years. They had not accounted for the kind of extreme market fluctuations that occur over longer periods. Their derivative pricing models did not provide the necessary buffer for such extreme fluctuations and when that occurred, they incurred unsustainable losses almost overnight (they kept their Nobel prizes though).

    The Margin of Safety principle is closer to the Factor of Safety principle used in Engineering than anything used in Physics. This is where you calculate the maximum load you expect a structure to bear, and then design it to be able to withstand some higher multiplier of that maximum load.

    Ben Graham gave Margin of Safety calculations for both Stocks and Bonds and he backtested his formulas over a period of decades, some for even up to 50 years.

    It's all out there for those who have the time and patience. There's really nothing new under the sun.
    Sep 17, 2013. 02:35 AM | 2 Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    In the "Legacy of Benjamin Graham" video released by the Heilbrunn Center, Warren Buffett explains that Graham was focussed on refining a method that ordinary investors, without specialized knowledge or access, could apply to achieve the same results as he did.

    His book "The Intelligent Investor" is the embodiment of this philosophy - defining an investment approach anyone can apply with publicly available information.
    Sep 14, 2013. 03:18 AM | 2 Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    One of Graham's core principles is to never use estimates of any sort. Past numbers are objective and the same no matter who analyzes them. Future estimates are subjective and can vary from source to source.
    Sep 14, 2013. 02:42 AM | 2 Likes Like |Link to Comment
  • Invest In Stocks With A Margin Of Safety To Reduce Risk And Enhance Returns [View article]
    Ben Graham actually gave 3 different intrinsic values for a stock - Defensive, Enterprising and NCAV - and 16 criteria for arriving at them them.

    For details, see "How To Build A Complete Benjamin Graham Portfolio":
    http://seekingalpha.co...
    Sep 14, 2013. 02:33 AM | 2 Likes Like |Link to Comment
  • Is This Miner Worth Its Weight In Gold? [View article]
    In later chapters, Graham gives more specific numbers for each of these criteria.

    Summarized from Chapter 14 of The Intelligent Investor - Stock Selection for the Defensive Investor:
    1. Not less than $100 million of annual sales.
    [Note: This works out to $500 million today based on the difference in CPI/Inflation from 1973]
    2-A. Current assets should be at least twice current liabilities.
    2-B. Long-term debt should not exceed the net current assets.
    3. Some earnings for the common stock in each of the past 10 years.
    4. Uninterrupted [dividend] payments for at least the past 20 years.
    5. A minimum increase of at least one-third in per-share earnings in the past 10 years.
    6. Current price should not be more than 15 times average earnings.
    7. Current price should not be more than 1-1⁄2 times the book value.
    As a rule of thumb, we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5.
    May 25, 2013. 10:58 PM | 2 Likes Like |Link to Comment
COMMENTS STATS
512 Comments
240 Likes