10 Stocks Benjamin Graham Might Love Today

by: Scott's Investments

Benjamin Graham is widely considered the father of fundamental analysis. Graham's book, "The Intelligent Investor" has served for decades as a foundation for value investors and is a "recommended read" on Scott's Investments. Graham sought a margin of safety, favored low price-to-tangible book value companies and low price-to-earnings ratios.

Since Benjamin Graham is no longer alive, it is impossible to know exactly which stocks he would invest in today. In fact, Graham favored stocks with P/E ratios in the single digits - a tall order in today's environment. Thus, we will take some liberty in interpreting his valuation standards and use online tools for identifying potential "Graham" candidates.

Using Stockscreen123, we first screen for the following, excluding companies which do not meet the following criteria:

  • No Over-the-Counter Stocks or Closed-End Funds
  • Current Ratio must be at least 1.5
  • Long-term debt must be no higher than 10% above working capital
  • EPS above breakeven the past 4 quarters and each of the past 5 annual periods
  • Trailing 12 month EPS > EPS in the latest annual period
  • EPS in the latest annual period > EPS in the prior year and 5 years ago
  • The company must have paid a dividend in the last 12 months

As of today 167 stocks remain after running the screen. Next, we rank the remaining stocks using Portfolio123's Graham ranking system, which assigns the following weights to each stock assign an overall rank:

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)

The results of the top 10 ranked stocks are below and includes a wide variety of stocks. One should always be cognizant of the potential for value traps but the emphasis on earnings growth and stability seeks to minimize this potential:

Ticker Name Rank MktCap CurRatioQ
LPHI Life Partners Holdings, Inc. 95.01 148.78 4.02
AVX AVX Corporation 94.93 2619.77 6.95
CMTL Comtech Telecomm. Corp. 92.9 741.31 7.93
JCS Communications Systems, Inc. 91.37 126.95 6.38
CVX Chevron Corporation 90.95 205040.91 1.68
SGC Superior Uniform Group, Inc. 90.51 67.25 7.03
BG Bunge Limited 90.5 10342.21 1.58
ADM Archer Daniels Midland Compan 89.78 23325.26 1.57
WWVY Warwick Valley Telephone Comp 87.98 80.49 2.91
SXT Sensient Technologies Corpora 87.69 1647.74 3.28

How has this strategy performed in recent years? Using the methodology above and re-balancing every 4 weeks, the five year performance has returned 251% and 2 year performance 186%, excluding commissions, slippage and taxes. Like most long-only strategies it struggled in late 2008/early 2009 but the shorter and longer-term performance has been impressive.

Below are the 2-, 5-, and 9-year returns:

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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