WHAT ARE WE LOOKING FOR?
Back in September, 2008, we created a virtual portfolio of U.S. stocks based on the strategy of the late Benjamin Graham, who is known as the father of value investing. This was right before the stock market collapsed, and our portfolio paid the price - at least initially.
But as you'll see, our stocks have made a remarkable comeback.
THE GRAHAM APPROACH
Mr. Graham, who honed his stock-picking skills during the Great Depression, aimed to buy stocks at a discount to their "intrinsic value." In his widely praised book, The Intelligent Investor , he recommended focusing on companies with little debt and relatively low price-to-earnings ratios.
We used the Graham Value Investor screen developed by Validea.com. The screen looks for companies with the following attributes:
- Current assets must be at least double current liabilities, and long-term debt must not exceed net current assets (current assets minus current liabilities);
- Earnings per share must have grown by at least 30 per cent over the past 10 years (we're referring here to total earnings growth, not an annual average);
- The company must not have posted a loss in any of the past five years;
- The current price/earnings ratio and the P/E based on average earnings of the past three years must be 15 or less;
- The price-to-book ratio multiplied by the P/E must be less than 22.
For our virtual portfolio, we "invested" $10,000 (U.S.) in each stock.
We ran the screen on Sept. 12, 2008, just in time to watch our stocks plunge in value. But the market recovery has been good to our portfolio, which is up 9.5 per cent in U.S. dollars - excluding dividends - from the day we bought it. That handily beats the S&P 500, which is down 4.6 per cent over the same period.
Tomorrow we'll introduce a new batch of Graham stocks.