If Ben Graham Were Alive, He Might Like These 4 Stocks
Posted: August 11, 2020
August 10, 2020 (Maple Hill Syndicate) – When I formed my investment firm in 1999, I incorporated the word “Graham” in our toll-free number.
We no longer have a toll-free number, but my reverence for Ben Graham continues. Graham, who died in 1976, was a hedge fund manager, mentor to Warren Buffett, Columbia University professor, author of The Intelligent Investor, and patron saint of value investing.
Each year, I try to channel his spirit and make a guess about what stocks he would choose were he alive today.
I think Graham, at theoretical age 126, might be struggling a little. The value school of investing (bargain hunting) has been out of favor in recent years. Growth and momentum are all the rage.
But Graham’s methods were sound, I’m convinced. So, let’s look at some stocks that meet my simplified version of his criteria, to wit:
- Stock price 15 times earnings or less.
- Debt less than 50% of book value (corporate net worth).
- Stock price less than book value.
I think Graham would fancy insurer MetLife Inc. (MET), which sells for a mere five times earnings. The problems here are obvious. Low interest rates dampen the returns on its big bond portfolio. The coronavirus pandemic is increasing claims for both life insurance and health insurance.
Value investors like Graham can tolerate some problems if the stock price is cheap enough. At about $38, MetLife shares are where they were 15 years ago.
MetLife is the largest life insurance company in the U.S. It has shown a profit in 14 of the past 15 years. And it has a high Pietroski score – a measure that is intended to identify value stocks that have good chances for gains ahead.
Based in New York City, Central Securities Corp. (CET) is a closed-end investment company. These are similar to mutual funds, but trade on an exchange like stocks. Unlike mutual funds, closed-end funds may trade at a premium or discount to the value of their securities holdings.
Central trades at a substantial discount, close to 19%. That makes it a bargain in a sense, but investors should understand that a closed-end fund can trade at a discount for years.
Recently, the biggest holdings at Central Securities were Plymouth Rock Co. (22% of the portfolio), Analog Devices Inc. (6%), Intel Corp. (5%), Coherent Inc. (5%) and Hess Corp. (4%).
Mohawk Industries Inc. (MHK), based in Calhoun, Georgia, makes carpets, rugs, wood flooring and tile. I don’t think consumers will be in a free-spending mood for the next year, but I think the outlook for Mohawk is probably a little better than most people would think.
The pandemic hasn’t shut down new home buying, and new homes of course need carpet and tile. In addition, I suspect that people who are spending more time at home than before may want to spruce their place up.
Mohawk has two loss years during the last recession, and has had ten profitable years since then.
Ben Graham might be amused to see Graham Holdings Co. (GHC) on this list. This company is a fallen angel, the remnants of what once was a media empire built around The Washington Post.
Jeff Bezos, the CEO of Amazon.com Inc., personally bought the Post in 2013 for $250 million. Among Graham Holdings’ remaining businesses are the Kaplan education companies, seven television stations, Slate online magazine, and the Social Code digital advertising company.
Profits have been subdued but consistent. Graham Holdings posted a profit in 14 of the past 15 years.
This is the 18th column I’ve written about “Graham stocks.” The average 12-month return on these recommendations has been 15.8%, compared to 11.4% for the Standard & Poor’s 500 over the same 17 one-year periods.
The ghost of Graham had been doing even better but his edge has diminished because of losses in the past three years. Three years ago, the average return was more than 19%.
In 17 outings, my Graham choices have beaten the S&P 12 times, and have been profitable 11 times.
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.
Last year was the third consecutive year that my picks on Graham’s behalf were unsuccessful, as the value style continued to languish. Hampered by a 78% loss in Callon Petroleum Co. (CPE), my selections fell 17.9%, while the index rose 11.4%.
Greenbrier Companies Inc. (GBX) scored a 19.6% return, while Prudential Financial Inc. (PRU) declined 13.3% and Bank OZK (OZK) was flat.
Disclosure: My firm owns Amazon.com, MetLife and Prudential financial for one or more clients. I don’t own them personally, but my wife owns Amazon.com shares.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at firstname.lastname@example.org.