What Would the Great Benjamin Graham Buy Today?
Posted: August 08, 2017
When I started my investment firm almost 18 years ago, I arranged for an 800 number that contained the word Graham.
The phone number is no more. But I continue to pay homage to Benjamin Graham in a variety of ways, as do countless other value investors.
Graham, who lived from 1884 to 1976, was an investment manager, professor (counting Warren Buffett among his students) and author of seminal works on value investing such as “The Intelligent Investor” and (with David Dodd) “Security Analysis.”
Once a year, I try to select some stocks that I think Graham might buy if we were alive today.
My Graham-inspired picks have achieved an average 12-month return of 22.87%, versus 10.99% for the Standard & Poor’s 500 Index. In 14 outings from 2001 to the present, my Graham selections have been profitable 11 times and beaten the S&P 500 12 times.
Last year, my picks from channeling Graham’s ghost produced a 31.37% gain, led by a 109% return in China Yuchai International Ltd. (CYD). MetLife Inc (MET) returned about 38% and First Solar Inc. (FSLR) about 27%. Photronics Inc. (PLAB) and Atwood Oceanics Inc. (ATW) fell 2% and 15% respectively.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
I use a simplified version of Graham’s stock selection methods. To be considered a potential Graham selection in this column, a stock must:
- Sell for 12 times earnings or less.
- Sell for no more than 1.0 times book value (corporate net worth per share.
- Have debt less than 50% of corporate net worth.
Now that the stock market has climbed eight calendar years in a row (and more this year), it’s getting very hard to find stocks that might muster up to Graham’s cheapskate standards. This year, for the first time, not a single large-cap U.S. stock passes my screen.
But I have found a few mid-cap and small-cap stocks that do. As usual, I will recommend five.
Based in Nashville, Tennessee, Genesco Inc. operates shoe stores and cap stores. Its brands include Journeys, Lids, Johnson & Murphy, and Schuh.
Glamorous? No. But Genesco has put together a streak of 21 profitable years in a row (this will be the 22nd). There’s something to be said for that sort of consistency, even though earnings haven’t grown in most recent years.
Genesco shares sell for eight times earnings (compared to a market average of about 21 these days), and 0.7 times book value (versus 3.1 for the average stock.)
Assured Guaranty Ltd. (AGO), with headquarters in Hamilton, Bermuda, insures municipal bonds and some other financial transactions. It suffered losses in connection with the recent bankruptcy of Detroit, Michigan, but those losses appear to me to be tolerable.
The market, knowing that municipal bond insurance can be a treacherous business, gives Assured Guaranty a multiple of only seven times earnings and 0.8 times book value.
Even though it had a big gain in the past year, China Yuchai still sells for only nine times earnings and 0.8 times book value. I continue to like this Singapore-based company, which makes, sells and services diesel engines in mainland China.
Sales growth has been negative in the past five years, but analysts expect some growth in both sales and earnings this year and next.
BlackRock Capital Investment Corp. (BKCC) is a business development company, providing financing to middle-sized companies. Only four Wall Street analysts follow it, and not a single one gives it a buy rating.
I, however, am attracted to the company for its down-to-earth valuations – nine times earnings and 0.9 times book value. The dividend yield looks fat, at 9.6%, but the company may have to cut the dividend, which isn’t adequately supported by recent earnings.
Manning & Napier
My last pick may is Manning & Napier Inc. (MN), a Fairport, New York firm that manages investment accounts, trust funds and mutual funds. Revenue and earnings have declined three years in a row, and analysts think the decline will extend into 2018.
Why pick an active investment manager at a time when passive investments (index funds and related products) are all the rage? I think the trend to passive investing has gone to an extreme and become a fad. I expect it to reverse.
Disclosure: I own China Yuchai shares for some of my clients with high risk tolerance.