Greenblatt And Graham Screens For European Value Plays

Greenblatt And Graham Screens For European Value Plays

With so much interest in value investing, and market conditions that lean in favor of value (right now anyway), Morgan Stanley (NYSE:MS) regularly uses two screens specifically aimed at finding quality stocks that may be underpriced.

Joel Greenblatt screen

The Joel Greenblatt screen, inspired by the renowned value investor, focuses on high-quality non-financial companies, and tries to determine which ones are currently cheap by looking for low EV/EBITDA ratios and a high ROCE.

The Greenblatt screen found four companies overweight. British energy firm Afren Plc (LON:AFR) (OTCMKTS:AFRNY), with a market cap of $2.33 billion and trading around £1.35, has an EV/EBITDA of 2.8 and ROCE percentage of 24.2. Italian energy firm Eni SpA (BIT:ENI) (NYSE:E) has an $84 billion market cap, €17.38 share price, an EV/EBITDA ratio of 3.1 and a ROCE of 16.3.  Total is the biggest of the lot with a market cap of $138 billion and a share price of €43.22, an EV/EBITDA ratio of 3.8 and 18.1 ROCE. The only non-energy firm to be overweight on the Greenblatt screen this month, BASF SE (ADR) (OTCMKTS:BASFY) (ETR:BAS), has a market cap of $87 billion, a share price of €71.14, an EV/EBITDA ratio of 7.2 and 16.4 ROCE.

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With just four overweight firms out of 50, and nine rated underweight, this gives some credence to the argument that while equities are growing, it’s tough to find a good deal.

Joel Greenblatt stocks 1013

Ben Graham screen

The Ben Graham screen is based on the approach outlined in The Intelligent Investor, generally seen as the birth of value investing, and looks for companies that fit four criteria. It must be of adequate size (market cap above $500 million and sales above $100 million); EPS and DPS must be positive every year for the last decade; earnings growth has to be above 33 percent for the last decade; and valuations need to relatively low (price to three year average EPS less than 15, a price-to-book ratio below 1.5, and PE*P/B below 22.5). The last criterion is the one people normally associate with ‘value,’ but the first helps make sure that you are investing in a company that isn’t just going to go under.

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Total was the only company to be listed as overweight in both screens (its stats are above), which is a pretty compelling argument in its favor if you are looking for a solid value investment. Unlike the Greenblatt screen, this one allows financials, and three of the five overweight companies were in the financial sector. BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY) with market cap of $87 billion and a share price of €53.29; AAXA with a market cap of $56 billion and a share price of €18.11; and Mapfre SA (MCE:MAP) (OTCMKTS:MPFRF) with $11 billion market cap and a share price of €2.72. The final overweight company was French industrial firm Vinci SA (EPA:DG) (OTCMKTS:VCISY) with a market cap of $36 billion and a share price of €44.75.

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