Graham Value Stock Portfolio Update: April 2014

by: Scott's Investments

In January 2012 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. I originally intended to update the portfolio monthly; however, in the spirit of creating a lower turnover, value-driven portfolio it is now updated quarterly.

I have also added an additional criteria to limit turnover in the portfolio (see below). The Graham portfolio is an attempt to add a value strategy to Scott's Investments, which is otherwise focused on momentum, trend, income and market timing strategies.

The criteria used to select the stocks are listed below. The tool used to perform the screen and backtests are courtesy of Portfolio123 ("P123″).

The actual screen factors are below:

  • Liquidity filter: No OTC Stocks
  • Market capitalization > $100 million
  • 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)

Stocks will now be sold when they drop below the 75th percentile ranking based on the ranking system above. Improvements in the screening and testing platform (via Portfolio123) allows a change in the sell/turnover rule from previous updates.

I began tracking this portfolio real-time on January 13th, 2012. As of April 15th, 2014 it is up over 43%. A real-world application of this portfolio could also utilize stop losses in order to prevent large drawdowns in single positions. However, for the purposes of tracking the portfolio results, all positions are bought and held until rebalancing.

Below is a 14+ year backtest results for this screen using a quarterly rebalance and .50% slippage to help account for bid/ask spreads. Backtests include the 75th percentile sell rule (stocks will only be sold when they drop below the 75th percentile ranking):

The stocks being sold 4/15/2014 are listed below:

Symbol Name Purchase Date Percentage Gain/Loss
AGU Agrium 1/15/2014 -1.72%
AGI Alamos Gold Inc 4/15/2013 -9.38%
CVI CVR Energy 1/15/2014 13.08%
HP Helmerich & Payne Inc. 7/17/2012 145.17%
CVX Chevron 1/15/2014 0.94%
TESS TESSCO Technologies Inc 7/17/2012 62.17%
CF CF Industries Holdings Inc 1/15/2013 10.99%

The current portfolio is listed below.

Symbol Name
BGFV* Big 5 Sporting Goods Corp
BWC* The Babcock & Wilcox Company
HFC HollyFrontier Corp
CHRM Charm Communications
CLMS* Calamos Asset Management Inc.
CSH* Cash America International
CTCM* CTC Media, Inc
HUM Humana
JST Jinpan International
SWM Schweitzer-Mauduit Intl Inc
WMK Weis Markets Inc.
RCKY Rocky Brands
SCVL Shoe Carnival Inc.
DDS* Dillard's Inc.
KALU* Kaiser Aluminum Corporation

*new position as of 4/15/2014

Disclosure: None

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