If Only Ben Graham Could Speak to Us
Posted: August 13, 2024
August 12, 2024 — (Maple Hill Syndicate) – I wish we could bring Benjamin Graham back to life for a strategy huddle.
Graham (1884-1976) was a hedge-fund manager, author and Columbia University professor. He is widely considered the father of value investing (essentially bargain hunting).
His style, to which I am an adherent, did well for most of eight decades but has struggled in the 16 years since the Great Recession. What would Graham say if he could talk with us now? I suspect he would say to keep the faith, as cheap stocks will perform well in the long run.
Each year I pick a few stocks that I believe the master might buy if he were alive today.
15.5% Average
My “Graham picks” last year rose only 9.0%, trailing behind the Standard & Poor’s 500 Total Return Index at 20.8%. Dragging down the return was a 14% loss in Seaboard Corp. (SEB). The best performer was U.S. Steel Corp., up 33%.
Over 21 years, my Graham-inspired selections have returned an average of 15.5%, including dividends. That beats the average return on the S&P 500 for the same periods, which was 11.9%.
My attempts to channel the ghost of Graham have beaten the index 14 times out of 21, and have also been profitable 14 times.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
We can’t, alas, bring the real Ben Graham back to life, but, using a simplified version of his criteria, here are a few stocks I believe he might like today.
Each of these stocks sells for 12 times the company’s per-share earnings or less. The average stock currently sports a multiple of about 24.
Each has debt less than 50% of corporate net worth (the average is more than 100%) and a stock price less than book value, or corporate net worth (the average is about two times book).
Unum Group
I’ll start with Unum Group (UNM) a specialist in disability insurance. I chose it as a Graham selection in 2022 and it rewarded me with a 30% return. Today, I again think that the maestro might like it, as it is selling for a mere eight times earnings, and has debt only 33% of corporate net worth.
Fake or questionable claims often plague disability insurers during recessions. Who knows when the next recession will come. But despite recent fears, I’m not expecting one soon.
Bank OZK
Bank OZK (OZK) is a regional bank with headquarters in Little Rock, Arkansas, and offices in eight states.
Many people would view Bank OZK as a risky investment, for a couple of reasons. It has a good chunk of commercial real estate loans, and the troubles of office buildings in the Covid and post-Covid era are well known. Also, the bank has expanded into new territories and new types of loans.
I think that Graham might find these risks acceptable. The stock sells for seven times earnings and debt is only 16% of corporate net worth.
G-III Apparel
G-III Apparel Group Ltd. (GIII), based in New York City, makes clothing under the Calvin Klein, Donna Karan, DKNY, Karl Lagerfeld and Tommy Hilfiger brands, plus a variety of private labels. It has been profitable in 14 of the past 15 years.
The “rag trade” is known for slim profit margins, but G-III’s margin is not bad, 5.8% after taxes. A number of money managers I respect own the stock, including Caxton Associates, Jeremy Grantham, Joel Greenblatt and Chuck Royce.
Peabody Energy
Investors scorn coal companies because coal is a high-polluting fuel and coal mining companies have spotty earnings history. However, I believe that the rising demand for electricity from data centers will extend the viability of coal companies into the 2030s.
One of the largest is Peabody Energy Corp. (BTU). Peabody posted six losses in the past ten years, but has a three-year profit streak going. Analysts expect the company to be profitable in 2024, 2025 and 2026. The stock sells for six times earnings and the company’s debt is low.
HF Sinclair
Refining is a cyclical business, but HF Sinclair Corp. (DINO) has managed 13 profits in the past 15 years, and has been nicely profitable lately. The advent of electric cars is a threat to refiners (who will sell less gasoline) but not an imminent threat in my opinion.
I think Graham would like the price/earnings ratio of seven, and the dividend yield of 4.1%.
Disclosure: I don’t personally own the stocks discussed in today’s column. I own Bank OZK shares for one client.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.