The first book I ever read about security analysis was Benjamin Graham’s, “Intelligent Investor”. It was time well spent, and I feel like I am in good company, because Professor Graham influenced many investors, most famously, Warren Buffett.
There are a few sites that will use Graham’s methods to find undervalued stocks so one can invest like he would. Validea and The Guru Investor are two pay sites that will generate stock ideas based on Graham’s screening techniques. Or one can do it themselves, and use some free and available tools to do the same.
First one needs to understand some Graham basics to set up a screen. I used Zacks basic screener to do the job.
- Look for companies with a market cap of at least $2 billion (Size & Share Volume, Market Cap >=2000). This keeps one out of the small cap space.
- P/E (Trailing 12 months) <= 15 (Valuation). This is his first step in finding value investments.
- 5 Yr Div Yield (%) >=0.01 (Dividends). This ensures that the company has paid a dividend in the last five years.
- Current Ratio >=2 (Liquidity & Coverage). This is a liquidation ratio that helps one to find companies that have plenty of assets, including cash, compared to its liabilities.
- 5 Yr. Hist. EPS Growth >= 2.9 (EPS Growth). This makes sure the company’s earnings are at least in line with inflation.
- Debt/Assets <=1.0 (Excel will help with this)
- Price to book * P/E <=22.5 (More Excel to take care of this)
Make sure that you go to “Edit View” to find and check Long Term Debt and Current Assets (Balance Sheet). Also, check off Price to Book (Valuation). You want these data to export to Excel after you search for the results.
Once in Excel, add two columns. The first column, you will divided the debt by the assets. Filter for companies that have a ratio less than one. The second column, you will multiply the P/E by the Price to Book, and filter for companies that have a multiple less than 22.5. Additionally, filter out companies in the tech, financial, and utilities sector, and you will have nice list of stocks from which to investigate.
This is what I came up with:
CVR Energy (NYSE: CVI) CVR Energy is an independent petroleum refiner and marketer of high value transportation fuels in the mid-continental U.S. and, through a limited partnership, a producer of ammonia and urea ammonia nitrate, or UAN, fertilizers.
HollyFrontier (NYSE: HFC) An independent petroleum refiner which produces high value light products such as gasoline, diesel fuel and jet fuel.
Industrios Bachoco, S.A.B. de C.V. (NYSE: IBA) The Company is engaged in breeding, processing and marketing of poultry, swine and other products.
Icahn Enterprises (NASDAQ: IEP) Gas exploration and production, Gaming, Real Estate and Home Fashion.
National Oilwell Varco (NYSE: NOV) The Company is a worldwide provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry.
Triumph Group (NYSE: TGI) The Company through its subsidiaries, engages in the design, engineering, manufacture, repair, overhaul, and distribution of aircraft components.
I hope this works for you. According to Validea, using a Benjamin Graham approach would have yielded one an annual 16% return since 2003. Compared to the S&P’s annual 6% return during that same time period, one can beat the market using this approach.
Good luck and happy investing.