7 Defensive Investor Quick Picks For March

About Benjamin Graham and his Criteria for the Defensive Investor

For those unfamiliar, Benjamin Graham is best known for being the mentor to the second wealthiest individual in the U.S., Warren Buffett. Considered by many to be the "father of value investing", Graham wrote the book, "The Intelligent Investor" (you can find it on Amazon here), which he describes the investment philosophy that his firm used to achieve annualized returns of about 20% from 1936 to 1956.

For more information on his criteria, see my article from last month, I describe the seven criteria in full detail there.

Review of Last Month's Picks

In the February 2013 article, a total of six companies were recommended: Baker Hughes (BHI), Cash America International (CSH), Holly Frontier Corporation (HFC), Alamo Group (ALG), Reliance Steel & Aluminum (RS), and Sasol Ltd. (SSL). Below summarizes the price of each equity on Feb. 1, 2013 when the article was published, the target price based on the Graham Number, the highest the stock could have been sold for in the last month, the closing price on Mar. 1, 2013, and the percentage change in price.

[Note: The Graham Number for SSL was revised from 131.14 to 44.09. This is due to an error in calculating earnings. The corrected number is above 44.09.]

A portfolio giving equal weight to these stocks would have returned 2.9% over the last month. A higher average return of 4.7% could have been realized if the investor sold RS when came within just a few cents of the Graham number in the middle of the month.

As comparison, over the same period, the S&P500 Spider ETF (SPY) was only up 0.58%, the Dow Jones Spider ETF (DIA) was only up 0.72%, and the Nasdaq Powershares ETF (QQQ) was down 0.41%.

7 Picks for March

March's Benjamin Graham Defensive Investor quick picks did not change much. The list includes the six from February plus one new addition: Weis Markets (WMK).

Symbol	Current Share Price1	Net Sales2	Current Ratio2	Ratio Current Assets to Long Term Debt3	Positive 10 Year Earnings4	Dividends Paid Since5	Earnings Growth6	Graham Number7
BHI	44.39	21.4B	2.5	2.5	Pass	1987	198%	51.00
CSH	51.99	1.8B	5.5	1.6	Pass	1988	297%	58.39
HFC	56.95	15.4B	2.2	3.8	Pass	1991	607%	64.56
ALG	36.00	626M	4.0	32.0	Pass	1993	214%	39.53
RS	65.87	8.4B	4.5	1.8	Pass	1994	200%	75.34
SSL	43.75	19.3B	2.1	5.1	Pass	1994	270%	46.44
WMK	40.96	2.75B	2.1	N/A	Pass	1990	122%	44.04
1 Data from Google Finance 2 Data from Yahoo Finance 3 Calculated based on data from http://www.gurufocus.com/ 4 Data from MSN Finance 5 Data comes from: http://www.dividendinvestor.com/ 6 Calculated based on data from http://www.gurufocus.com/ by averaging the first three years of the decade and the last three years of the decade. 7 Calculated based on data from Yahoo Finance

Click to enlarge

Two companies were put on the watch list this month. One is a former pick, Helmerich & Payne (HP), which saw it's stock price retreat in February and is currently 4% under its Graham number. The other company on is Teck Resources Lt (TCK), which currently meets all the criteria but is priced in line with its Graham number.

Conclusion

Overall, stocks selected using the criteria Benjamin Graham created for the defensive investor have performed well during the first two months of 2013. With January, the picks returning an average 15.5% and the February picks returning another 2.9%, investors who implemented this strategy could have been up almost 19.4%.

As always, look forward to comments below and make sure to follow so you get next month's update.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RS, CSH, BHI, HFC, SSL, ALG, WMK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[findrichard]

Awesome site, thanks Clinton.

[findrichard]

Clinton, what happened to your monthly report posting? I use Graham's defensive investor stock selection methodology for my investment portfolio and just ran across your past posts. Is there a stock screen online that will select stocks according to Graham's original criteria that does not charge monthly and is not modified beyond adjusting the minimum sales figure for inflation? The only screen I have found true to Graham's criteria is on GuruFocus.com but they charge a significant amount each month to use their service.

[GrahamValue]

Hello findrichard,

That is exactly what Serenity's stock screeners do.

Two entire chapters of The Intelligent Investor are dedicated to methods that Graham recommends for investors:

1. Chapter 14: Stock Selection for the Defensive Investor, and
2. Chapter 15: Stock Selection for the Enterprising Investor

The sixteen criteria mentioned in those chapters are designed to verify all aspects of a stock before investment. http://seekingalpha.co... lists all sixteen criteria, and gives step-by-step instructions on how to find stocks that meet them.

[supernano]

What eps are you using to calculate the graham number? If I use the one from the last report I get a lower number, if I use the one from this years forecast I get a higher one…

[Joe Away from Beach]

For HFC, using the 22 times, the curent annual eanrings ($8.38), the book value ( 11.6 billion market cap/203.55 miliion shares outstanding). I have the square root as 102.5,not the 64 56 that you came up with.

[David Huston]

I think you you point out some good companies here, but you could take it a step further. I'd like to clarify that Graham spends a lot of time emphasizing the PE and P/B as critical for identifyIng value, and they need to be compared over a period of years and versus industry peers.

So BHI appears to be a good investment according to BG's logic because it trades at a p/b of 1.15 and fwd p/e of 10.23. That needs to be viewed in context of debt and dividend history - dividends have been flat since 2008 and the company carries a reasonable amount of debt. More detail wanted here!

[Clinton Holmes]

Fair point Dashan. Maybe I'll start to follow up this monthly quick pick article with some more in depth analysis of some of the companies highlighted.

[Activist Stocks]

I'm with David here...would love to get some of your insight on what your top 2 or 3 stocks are and some deeper thoughts on them. But thanks for the article...always love to come across new ways of finding investment ideas.

[Clinton Holmes]

John,

Thanks for the comment. Serenity and I both use the same formula for graham number: sqrt(22.5*EPS*BVS) so the coming from the inputs for earnings per share and book value per share. I'm not sure where you saw Serenity's calculations, I'm assuming here:
http://bit.ly/Y9nmin
http://bit.ly/13COyhy

It looks like Serenity gets their data from Yahoo! Finance while I source mine from Guru Focus. The differences don't appear to be drastic though - Serenity had Graham numbers of 39.24 and 52.57 for ALG and BHI respectively, while I had values of 39.53 and 51.00.

Does that help answer your question?

Best Regards,
-Clinton

[GrahamValue]

Thank you, Clinton!

Serenity just got a full database and code upgrade for 2013.
The screeners now check 4700 stocks for Graham's 16 criteria.

The list of fully defensive Graham stocks for 2013 was just published yesterday.
http://seekingalpha.co...

Also, unlike the book values on other sources, the ones on Serenity are now calculated excluding Goodwill and other Intangibles.
So Serenity's screeners are now even more selective than they were before.

[stem23]

Clinton,

I was wondering if you would know the rationale of the difference of the Graham number you and Serenity have calculated for BHI and ALG , for example.

Thanks,
John

[charliezap]

"""Inexpensive Natgas is one the reasons we have companies moving back into the U.S."""

In fact, Sasol (SSL) is building an ethane cracker (provides feedstock for the petrochemical industry in Louisiana. They are also doing the engineering work for a proposed GTL (gas-to-liquids, actually natural gas to diesel) plant at the same location. All based on access to cheap natural gas supplies. Sasol is a South Africa based company that is a pioneer in the area of coal-to-liquids and GTL.

[vallies]

Getting slapped off of Gina McCarthy. Watching comments from Donna Harman. It does have marginal presures. Still long. Watching the 42.41 levels. It makes sense to keep fracking in place. It is where the growth is coming from. Check out the midwest banks. I own HBAN. KEY is holding nicely. Inexpensive Natgas is one the reasons we have companies moving back into the U.S. Ohio will be doing better becuase of the tax structure along with Texas. Detroit is having its problems becuase of its burdens. We will have to wait and see.