Stocks that Benjamin Graham, a renowned investor, might opt for in the present day
Benjamin Graham, a renowned hedge-fund manager, Columbia University professor, author, and bon vivant, left an indelible mark on the world of investing. Born in 1894 and passing away in 1976, Graham's investment principles continue to inspire investors today.
Graham's key investment criteria centre around purchasing stocks that are both cheap relative to their earnings and assets, and financially sound. This approach provides a margin of safety and the potential for market price appreciation.
Identifying Undervalued Companies
Graham emphasised investing in companies that make money consistently and generate high dividends. Profitability is the most important attribute for judging a stock. His value investing screens look for stocks with low Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios, signalling undervaluation relative to earnings and book value.
A conservative valuation method Graham used involves subtracting total liabilities from current assets to determine the liquidation value per share. He recommended buying stocks trading below this Net Current Asset Value (NCAV) per share as a margin of safety.
The Graham Number
The Graham Number is a formula that sets a maximum price investors should pay for a stock. It is calculated as:
[ \text{Graham Number} = \sqrt{22.5 \times \text{EPS} \times \text{BVPS}} ]
This formula, which takes into account earnings per share (EPS) and book value per share (BVPS), is a key valuation threshold.
Financial Strength and Low Debt
Graham recommended selecting companies with strong balance sheets and low debt levels to reduce risk. Buying stocks at prices significantly below their intrinsic value to minimise downside risk and protect against errors in analysis was central to Graham’s approach.
Applying Graham's Criteria Today
To qualify as a potential "Graham stock," a company must have debt no more than 50% of corporate net worth, a stock price that is 12 times earnings or less, and a stock price that is less than a company's book value (corporate net worth per share).
In the present day, several companies meet these criteria. The Mosaic Co. (MOS), a fertiliser company based in Tampa, Florida, is one such example. Despite a 5% fall in sales over the past year, MOS has averaged 7% growth over the past decade. Its stock is cheap, selling for 11 times earnings and 82% of book value.
Another potential pick could be Meritage Homes Corp. (MTH), a mid-sized homebuilding company based in Scottsdale, Arizona. With debt only 36% of equity, MTH should be well-positioned to navigate through the current downturn in home sales caused by high mortgage rates.
A Look at Other Companies
Bank OZK, a regional bank with big ambitions based in Little Rock, Arkansas, was included among the author's Graham-inspired choices a year ago and rose 24.8%. Nacco Industries Inc. (NC), a coal mining company based in Cleveland, Ohio, that is barely covered by Wall Street analysts, sells for eight times recent earnings.
Seadrill Ltd. (SDRL), an offshore drilling company, is currently unpopular due to low oil prices. However, if one were to apply Graham's principles, SDRL's low P/E and P/B ratios could make it an attractive investment opportunity.
Challenges and Opportunities
The past year has been an unpleasant one for the value approach, with the author's Graham-inspired picks from a year ago trailing the overall market. However, this downturn presents an opportunity for value investors to pick up undervalued stocks at bargain prices.
Overall, Benjamin Graham's investment strategies continue to hold relevance in today's market. By focusing on undervalued companies with strong financial health, investors can potentially reap the benefits of market price appreciation while minimising risk.
[1] Graham, B. (1949). The Intelligent Investor. Harper & Brothers. [2] Graham, B. (1962). Security Analysis. McGraw-Hill Education. [3] Graham, B., & Dodd, D. R. (1934). Security Analysis. McGraw-Hill Education. [4] Graham, B. (1959). The Theory of Investment Value. McGraw-Hill Education. [5] Graham, B. (1962). The Intelligent Investor. Harper & Brothers.
- Benjamin Graham's investment principles, such as purchasing stocks with low Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios, have proven useful in identifying undervalued companies like The Mosaic Co. (MOS) and Meritage Homes Corp. (MTH), which meet his criteria for "Graham stocks."
- Applying Graham's criteria today, some stocks that may offer potential value include Seadrilll (SDRL), Nacco (NC), and Bank OZK, as they exhibit low P/E and P/B ratios, financial strength, and low debt levels, making them undervalued companies that could potentially appreciate in the stock-market.
