Where Would Late Great Stock Guru Ben Graham Invest? by John Dorfman, Dorfman Value Investments
If Ben Graham were alive to see today’s pricey stock market, what would he buy?
Every year, I try to pay homage to the man widely considered the father of value investing. Graham was a professor, bon vivant, hedge fund manager, and the author of books such as “The Intelligent Investor.” Each August, I try to figure out what he would buy if he were alive.
The column you’re reading represents my 14th such attempt. Of the first 13 columns, 11 beat the Standard & Poor’s 500 Index, and 10 were profitable.
The average 12-month return on my “Graham” selections has been 22.2 percent, compared to 10.6 percent for the index.
My latest column on this subject continued the tradition. Led by EZCorp — a chain of pawn shops, of all things — my Graham-inspired selections rose 13.75 percent to the S&P’s 7.25 percent from Aug. 11, 2015, through Aug. 11, 2016.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
Ben Graham criteria
For this column, I use a simplified version of Graham’s stock-selection criteria. To be considered as a potential “Graham stock,” an equity must:
- Sell for 12 times per-share earnings or less.
- Sell for 1.0 times book value (corporate net worth per share) or less.
- Have debt less than 50 percent of corporate net worth.
Finding stocks that meet these criteria isn’t easy in today’s elevated market. The S&P 500 today sells for 25 times earnings and 2.9 times book, both well above normal.
Only 16 stocks passed my Graham screen this year, out of nearly 3,200 U.S.-traded stocks with a market value of $250 million or more. As usual, I will recommend five.
Insurance companies traditionally make much of their money by investing the “float” — money received from premiums that they don’t have to (at least yet) pay out in claims. In today’s era of unusually low interest rates, the old formula of investing the float in bonds or similar instruments doesn’t work well.
Interest rates won’t stay low forever, and I expect Met Life’s profits to improve gradually. Meanwhile, it yields 4 percent in dividends, has been raising its dividend steadily, and has plenty of room to raise it more.
This stock was in the Graham portfolio last year, and was the portfolio’s only loser, down 24.3 percent. I’m bringing it back for another try.
Neglected by U.S. analysts is China Yuchai International Ltd. (CYD), a Singapore company that makes and services diesel engines in China.
Sales declined last year, which I attribute to increased competition and a slowing economy in China. Nevertheless, I believe the company has a durable franchise.
I made money in China Yuchai about a decade ago but haven’t owned it recently. With the stock at eight times earnings and 0.4 times book value, I think the potential reward outweighs the risk.
Atwood Oceanics Inc. (ATW) is a relatively small offshore oil-drilling company based in Houston. Partly because of its size, it has held up better in the energy downturn than many larger competitors.
Atwood has only 10 offshore rigs, plus two offshore drillships under construction. It has been able to keep its fleet fairly well occupied. Recently, eight of its 10 rigs were working and two were idle. The eight working rigs served eight different customers.
With the energy industry on its knees, Atwood shares go for less than two times recent earnings, and 0.2 times book value.
Based in (sunny) Tempe, Ariz., First Solar Inc. (FSLR) makes solar panels and builds solar-energy installations. Its most profitable period was in 2007-10, when many states’ incentives for people to use solar energy were stronger than they are today. Its latest results are the best since 2010.
The stock peaked at more than $300 a share in 2008 and sells for about $39 now. At today’s price, First Solar stock sells for attractive ratios to fundamental measures of value — six times earnings and 0.7 times book value.
After taking a bath in the recession of 2008-09, Photronics Inc. (PLAB) seems headed for its seventh straight year of profits, with record profits likely.
The company, with headquarters in Brookfield, Conn., makes photomasks, which are high-precision quartz plates containing microscopic images of electronic circuits. These plates are used to make semiconductor chips and flat-panel displays.
Photronics has a diversified customer base, which includes, among others, Texas Instruments, Micron, and AU Optronics. At 11.3 times earnings and 0.97 times book value, it squeaked into my Graham screen this year.