From 100 Years Ago – Benjamin Graham On Bargain Hunting Through The Bond List [Pt. 1]

From 100 Years Ago – Benjamin Graham On Bargain Hunting Through The Bond List [Pt. 1]

Every so often the internet throws up an undiscovered gem from the world of value investing. The latest offering is a selection of articles written by Benjamin Graham in 1918 for the Magazine of Wall Street.

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These articles cover several topics including analysis by Benjamin Graham on several securities, giving us a fascinating insight into the way the Godfather of value investing analyzed securities and how he looked for value.

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I've already covered several of these articles which looked at a so-called, "Speculative Opportunities In Railroad Stocks" and a utility company Consolidated Gas. In this article, I'm coving an article written by Graham called "Bargain Hunting Through The Bond List," which gives us a great insight into his analytical mind.

Bargain Hunting Through The Bond List

What's great about this old article is that it provides a fascinating insight into the way Benjamin Graham analyzed and the underlying fundamentals of issuing companies.

He wastes no time getting into the numbers in the meat of the article with an analysis of railroad concern Houston & Texas Central:

"Among the score of bonds grouped under the heading of Southern Pacific, appears the following item; Houston & Texas Central 1st 5s, interest guaranteed, due 1937. Outstanding $1,389,000. Quite a few of these bonds have sold recently at 96; the last sale, however, was noted at 97, at which price the yield is 5.25%. Not such a wonderful return you say; but let us first see in what class the issue belongs.

According to the Railroad Manual, Houston & Texas Central 5s are a first lien on 453 miles of road, running into Houston. The bonded debt per mile figures out therefor at only $3,128. This is an extraordinarily low rate in any case, and especially so in view of the profitable character of the mortgaged line, as evidenced by the company's separate report."

These bonds appeared to offer the potential for a quick return, with very limited risk. And in the article, Graham goes on to note that of the total original bond issue $6,711,000 "of the bonds originally admitted have been retired at 110 buy a sinking fund provided from the proceeds of land sales." Not only was the issue well provisioned for but it was also guaranteed by parent company Southern Pacific Co. With practically no risk to bondholder capital, Graham claimed this "is about as safe an investment as can be found anywhere."

The next issue discussed is the East Tennessee, Virginia and Georgia 1st 5s. Last traded at 95, yielding 5.6% this bond was secured by the first lien "on the very important line running through Nashville and Chattanooga." Graham goes on to write:

"The holder of these bonds is not only "close to the rails" but is surrounded by layer upon layer of junior issue padding to absorb the stocks of a possible reorganization. It is particularly recommended that this obligation be purchased in place of Southern Railway consol 5's, which sell at a higher price and yet are not as well secured as are the underlying E. T. Va. Ga. bonds."

The article moves away from railroad bonds to concentrate on industrial bonds.

Granby Copper 6's due 1928 are Graham's first target. Trading at par this issue looks secure because the company has $15 million of stock with a "market value of $12,000,000, junior to but $2,500,000 of bonds." Graham continues, "in other words, the mortgaged property here is pledged at only 18% of its current realizable value." Added to this security is sinking fund with the obligation to acquire outstanding bonds at 110:

"Perhaps the most interesting feature of this issue is the large sinking fund of 10% of net earnings plus the fixed sum of $40,000. This provision is almost certain to retire the entire issue before maturity, and since the trustee must pay 110 for the bonds, if not obtainable for less, the patient bondholder could successfully hold out for the top price—and again a ten point premium in addition to his excellent return."

Continued in part two...

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