Most readers of SA will already have some familiarity with the work of Benjamin Graham. Pertaining to this post (and the series I intend on writing following it), I'll be misusing a formula which has become so synonymous with his name that it shares his name: The Graham number.
This post, and a series of follow up articles I'll be writing over the next year, will document the performance of a virtual portfolio I'll be trading in via the Investopedia Stock Exchange game platform. For those wishing to view portfolio performance directly, participation in the game is necessary (participation requires creating a free account with Investopedia).
As mentioned above, for this trading plan, I'm not using the Graham number as intended. In The Intelligent Investor, Benjamin Graham advises the defensive investor to follow a selection plan which includes 7 minimum criteria an investor should follow, two of which are a price which does not exceed 150% of book value and a price which does not exceed 15 times earnings (chapter 14, Graham). Of course, this still leaves 5 guidelines that we are not following here--minimum debt to asset ratios (no more than 1:1 for long-term debt), minimum annual sales, positive earnings (my own screen looks for this, however, Graham suggests going back 10 years), dividends (going back 20 years), and consistent per-share earnings.
My goal is to demonstrate a partial implementation of the formula which:
- I believe will outperform the market (specifically the S&P 500 index) over the long term.
- Is extremely simple in implementation and should require minimal maintenance or management.
- Can be maintained solely during non-trading hours, allowing an investor to walk away to a "day job".
- Can be managed completely through free sources, leaving any overhead only from brokerage and/or government fees.
During the first weekend of each month, I'll perform a screen using the screener at zacks.com using the following criteria:
- Member of the S&P 500 index
- 12 Month Trailing EPS >= $0.01
- Book Value / share >= $0.01
- Net Income >= $0.01
- Last Close >= $0.01
For the first weekend of May 2018, here are the companies trading below their Graham number:
|Company Name||Ticker||Last Close||12 Mo Trailing EPS||Book Value||Graham number||% diff|
|Prudential Financial, Inc.||PRU||100.66||10.87||123.64||173.8943731||72.75%|
|Ford Motor Company||F||11.36||1.81||9.17||19.32480918||70.11%|
|Lincoln National Corporation||LNC||68.95||7.83||73.24||113.5916238||64.74%|
|Capital One Financial Corporation||COF||89.06||8.69||101.18||140.6528332||57.93%|
|Newell Brands Inc.||NWL||27.65||2.75||28.94||42.31622029||53.04%|
|Range Resources Corporation||RRC||13.62||0.79||23.41||20.39884188||49.77%|
|The Goodyear Tire & Rubber Company||GT||25.28||2.9||20.69||36.74265233||45.34%|
|Kimco Realty Corporation||KIM||14.67||1.51||12.95||20.97561084||42.98%|
|Micron Technology, Inc.||MU||47.58||8.91||22.91||67.77080677||42.44%|
|Western Digital Corporation||WDC||77.28||14.07||37.97||109.6373693||41.87%|
|The Goldman Sachs Group, Inc.||GS||234.94||21.6||221.12||327.8175102||39.53%|
|Molson Coors Brewing Company||TAP||60.48||4.1||63.39||76.47043546||26.44%|
|Citizens Financial Group, Inc.||CFG||41.03||2.8||40.65||50.6058297||23.34%|
|Principal Financial Group, Inc.||PFG||57.15||5.18||42.58||70.44642645||23.27%|
|Pacific Gas & Electric Co.||PCG||44.88||3.52||37.85||54.75143834||22.00%|
|The Kraft Heinz Company||KHC||58.01||3.6||58.3||68.71899301||18.46%|
|Hewlett Packard Enterprise Company||HPE||17.21||1.19||15.31||20.24661083||17.64%|
|Leucadia National Corporation||LUK||24.45||1.25||28.88||28.5||16.56%|
|CVS Health Corporation||CVS||63.1||6.23||38.12||73.09904924||15.85%|
|Wells Fargo & Company||WFC||52.41||4.2||37||59.13121003||12.82%|
|Franklin Resources, Inc.||BEN||32.86||3.15||19.26||36.9466169||12.44%|
|Bank of America Corporation||BAC||29.3||2.03||23.58||32.81792955||12.01%|
|The Allstate Corporation||ALL||94.52||8.03||59.67||103.8310033||9.85%|
|People's United Financial, Inc.||PBCT||18.41||1.1||16.14||19.98662052||8.56%|
|Express Scripts Holding Company||ESRX||70.22||7.56||32.85||74.75148828||6.45%|
|The Bank of New York Mellon Corporation||BK||54.49||3.91||38.03||57.84193332||6.15%|
|SL Green Realty Corporation||SLG||99.92||6.53||75.3||105.1829478||5.27%|
|Foot Locker, Inc.||FL||41.67||4.11||20.78||43.8364061||5.20%|
|SunTrust Banks, Inc.||STI||66.6||4.47||47.5||69.11810544||3.78%|
|Johnson Controls International plc||JCI||36.25||2.65||23.63||37.53583288||3.55%|
|Affiliated Managers Group, Inc.||AMG||161.72||15.34||81.15||167.3586643||3.49%|
|Huntington Bancshares Incorporated||HBAN||14.7||1.05||9.17||14.71873806||0.13%|
Here are the trades inputted to the Investopedia game on the same weekend:
The first implementation of this screen resulted in 58 candidates for purchase (all screened stocks resulting in an undervalued condition; priced below their respective Graham number). For sake of simplicity, assuming no fractional values of shares to be held, assets were balanced as equally as possible.
There is likely a great deal of diversity reducing asset overlap as a number of the assets purchased are in the investment/financial services sector. Since this is a non-discretionally approach for this experiment--I'm allowing the sighted criteria to decided whether or not a stock will be held, regardless of other concerns; other approaches may attempt to more effectively diversify.
Also of note, Ford Motor Company (F), which I've written about in the past, shows up on the list to the tune of a 70% undervaluation (currently priced at around $11.50, Graham number > $19).
Simplicity being the goal here, assets will not be re-balanced. Instead, as they reach an overvalued state, they will be sold, proceeds to go to the balanced purchase of currently undervalued assets.
Follow-up articles will review such changes as well as reviewing the performance of various assets being held. I'll be aiming for a brief write up on 3 stocks.
Disclosure: I am/we are long F. 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.