What would Ben Graham Buy These Days?
I surmised at the time that Facebook (FB) , which had commenced trading just days earlier, would not have been interesting Graham due to his reluctance to purchase IPOs because he believed, for one, that sellers have the advantage over the buyers in new issues.
Graham had several investment criteria he used to find compelling candidates, and this one in particular focused on identifying stocks for the "defensive investor," which he discussed in his great work "The Intelligent Investor." Due to the fact that the last edition of this book Graham published was in 1973, I did modify Graham's original criteria slightly:
- Adequate Size: Graham excluded smaller companies; I've set the minimum market cap at $1 billion.
- Strong Financial Condition: Minimum current ratio of 2; long-term debt must be less than working capital.
- Earnings Stability: Graham required positive earnings for at least ten consecutive years: I am using seven years.
- Dividends: Graham required "uninterrupted" dividends for at least 20 years; I am using seven years here as well.
- Earnings Growth: Graham sought a minimum increase of 33% in earnings per share in the past 10 years; I am using a minimum compounded annual growth rate in earnings of 5% over seven years.
- Moderate Price-To-Earnings Ratio: Average P/E should be less than 15 over the past three years.
- Moderate Price-to-Assets Ratio: Graham sought companies with price-to-book ratios below 1.5, but would accept a higher P/E ratio, if price-to-book was lower. This end result was that P/E times price-to-book ratio should be less than 25.5.
- Other: U.S. companies only; I excluded foreign companies and American Depository Receipts from the results.
The search revealed just eight names that met these rather stringent criteria. Since my initial column ran in late May, these companies are up an average of 9.3%, slightly better that the S&P 500 which is up about 7.4% , and S&P Mid Cap Index which is up 8% during the same period.