Are there any Graham stocks on the ASX?

[systematic]

I haven't actually ever gotten into Ben Graham's works much - I've mainly learned from others who have no doubt also stood upon his shoulders. I must change that, as he was more quant than I realised.

Anyway, after looking at the "Top Stocks" recently, which have a couple criteria in line with Graham's, I decided to look at Gaham's criteria in more depth, and there's a bit to it.

The below are those that meet the Graham criteria (to the best of my ability)...with a couple points first:

- I have not used 10 and 20 years for things like earnings and dividends. I've used 5 years (which is co-incidental to Top Stocks). Otherwise we might not get any stocks at all! 5 years will have to do.
- I've sorted the table via Revenues, because I have not applied that critieria. As in, the blue chips, or highest revenues are the true Graham selections here, but some individual investors might not have any problems with the smaller companies.
- I've looked at liquidity but decided to leave them all intact. So, as you would anyway - apply your own liquidity rules.
- "PGP" is what I call "Price to Graham Price". Smaller is better. Less than "1.00" means the current price is 'value' (less than) the current "Graham Price".

19 stocks have made it. Many are a decent size and liquidity.

​

If you were to stick to the higher revenue companies (as per Graham), with decent liquidity you might go down to around "IRE".

Of course, for current purchases you'd want a PGP less than 1.00, which gives 2 current stocks for the ASX:
FWD & SGH.

7 other's have a value PGP but you'd want to check out size/liquidity for yourself etc. And certainly, from what (little) I've read, there's no reason not to do that - except perhaps as you get smaller you might want to slightly increase your demand for value (a smaller PGP). For example, LCM looks good on this basis, with good liquidity still.


Thanks to this thread for inspiring me to take a look.

 

[So_Cynical]

I haven't actually ever gotten into Ben Graham's works much - I've mainly learned from others who have no doubt also stood upon his shoulders. I must change that, as he was more quant than I realised.

Anyway, after looking at the "Top Stocks" recently, which have a couple criteria in line with Graham's, I decided to look at Graham's criteria in more depth, and there's a bit to it.

The below are those that meet the Graham criteria (to the best of my ability)...with a couple points first:

Of course, for current purchases you'd want a PGP less than 1.00, which gives 2 current stocks for the ASX:
FWD & SGH.

FWD has issues with the mining camps going forward and SGH was allot cheaper 8 and 9 months ago.

i hold SGH and have done for awhile, average price of $1.71 ~ FWD im watching with some interest.

Interesting list.

 

[kermit345]

I own HSN, hasn't really done much since I bought it in terms of growth but i'm happy to hold as it still pays a good yield and I still believe it has some growth in it.

IRE is a company i've had my eye on for at least 2-3 years now and its never got cheap enough for me to buy. Even at today's levels I feel its way over-priced. We use an IRESS application in our office though and given how their price works on a subscription basis per module etc, I understand why they are a good buy. Would just love to see them briefly drop to a cheaper level.

 

[systematic]

IRE is a company i've had my eye on for at least 2-3 years now and its never got cheap enough for me to buy. Even at today's levels I feel its way over-priced. We use an IRESS application in our office though and given how their price works on a subscription basis per module etc, I understand why they are a good buy. Would just love to see them briefly drop to a cheaper level.

...Yep, they'd have to crash by something like 70% to price qualify here!

 

[systematic]

FWD has issues with the mining camps going forward

...which brings up a point I want to make. My view on true "value" investing is that you will have a portfolio of stocks that look undesirable/troubled etc. A long shot at the race track looks like a long shot in the form guide, but doesn't mean they don't win.
Graham (from what I've been reading) often ended up with stocks that were "unfavoured by the analysts".
I simply mean: if a stock had every single (theoretical) box ticked, you wouldn't expect it to (at the same time) be neglected by the market. (Your comment re: FWD simply reminded me of a comment I wanted to make - not directed at your comment itself of course...)

SGH was allot cheaper 8 and 9 months ago.

...Hmmm...I wonder if it's worth tracking the PGP over time? Maybe. You could have some cool, "Skaffold" looking charts. Not sure though - in day to day application, if you need another stock for your portfolio now, it makes sense to look for 'the best' value stocks now. Why would it matter that the share price 12 months or 3 years ago made it better or worse value? Will have a think. Any comments welcome!

Interesting list.

...Yeah, I thought so too. Might keep my eye on it a bit.

I was actually just going to check out the Graham number and see which stocks were value, which many apparently do without realising the necessity of his other criteria (and I certainly haven't studied Graham's methods). Applying the other criteria used to short list in the first place made it interesting.

 

[odds-on]

The following link maybe of interest...

http://www.serenitystocks.com/how-build-complete-benjamin-graham-portfolio

It is also worth reading some of serenitystocks posting on www.gurufocus.com

IMO, each company needs to be categorised using the criteria into either Defensive, Enterprising, Ok/NCAV and "Rubbish". Once you have categorised them correctly then calculate the graham price using the correct formula for the criteria.

Depending on the data you have available another screen would be to look for companies that meet the following criteria:
-Consistent ROA over a 5 to 10 year period
-Retained earnings
-Above average total asset growth in the last two years (or below average total asset growth, this depends on your interpretation of the total asset growth anomaly)
-1 or 2 year rebalancing

Or another screener idea:
-Price to sales < 1
-Small cap
-Reasonable operating history over the last few years
-Safe balance sheet
-6 month rebalancing

And finally...
-52 week lows
-Altman Z score in the "grey" area. Worth using the Z'' formula to remove the market value of equity from the equation.
-3 or 6 months rebalancing

When chasing excess returns using value investing i always remember a comment made by Mohnish Pabrai, most of his value ideas take around 18 months to play out, but sometimes they take longer....rebalancing/holding period is important.

Cheers

Oddson

 

[So_Cynical]

A long shot at the race track looks like a long shot in the form guide, but doesn't mean they don't win.

Thing is that for the vast majority of long shots it means exactly that...they wont win because the form says they can't, and the form is right, after all form is fact..its a study on what the horse has done and therefore is capable of.

*
...Hmmm...I wonder if it's worth tracking the PGP over time? Maybe. You could have some cool, "Skaffold" looking charts. Not sure though - in day to day application, if you need another stock for your portfolio now, it makes sense to look for 'the best' value stocks now. Why would it matter that the share price 12 months or 3 years ago made it better or worse value? Will have a think. Any comments welcome!

My trading and wealth acquisition strategy is all based around time.

• Best time to enter (low price)
• Best time to average down (lower price)
• Best time to hold (do nothing)
• Best time to part sell (release capital)
• Best time to sell out

The best time to buy SGH is gone, i however got a parcel at $1.505

https://www.aussiestockforums.com/forums/showthread.php?t=6931&page=2&p=718166&viewfull=1#post718166

This chart from the SGH thread.
~

 

[systematic]

Thanks odds-on, I'm finding the Graham stuff interesting (and I've been reading serenity stocks - an invaluable help), it's a nice diversion from what I usually do with quant value.

I'm still sticking with what I do now, but I'm going to be tracking the Graham stuff more. There's a version of his "intelligent investor" that Jason Zweig (I believe) adds comment and gives a modern rendering. Going to look into that.


Some great thoughts there.

The first screen you mention doesn't really strike me as a value screen. From what I've learned, As a quality criteria, ROA and a couple others you mention can help with consistency of a method (not a bad thing!) but doesn't necessarily add to the absolute return. Still, I'm leaning more towards adding in quality factors to my "pure value" approach, under a bit of duress mind you (David Dreman, an early influence, would understand); maybe it's an age thing, lol. A little bit of quality doesn't hurt.


The next screen you mention with Price to Sales is close to what I do. I just don't necessarily add safety criteria
or quality. Mind you, more recently I have been looking at Financial Scores, and I like them - so I'm open.


You just have to be so careful about adding more into simple models, otherwise they don't remain simple - and that is not what you want, in my opinion.

I had to bold that because it's a very important concept to me, and it's such an integral part of what I've learned in my investing education thus far.


Rebalancing frequency of 6 months isn't really necessary in my opinion - you're later quote from Pabrai is pertinent here. I don't use rebalancing anyway. It's typically used in the academic studies, but there's other more creative options.



The final screen - whoa, you'll have the trend followers coming after you, lol. But seriously, 52wk lows, I wouldn't use it as a factor at all. Not really correlated with value (in the way longer term negative return is). And definitely not a momentum factor!

Altman Z - I've not bothered with a risk of bankruptcy score, but recently been looking at it (a little).
Firstly, I presume you meant "minimum" grey area (i.e. safe area is okay too?)

There are better models than Altman's Z, that are more complex to implement, and so at the moment I use neither. See Shumway 2001 followed by Chava and Jarrow 2004 and Campbell 2010.
I might have a play with the main sentiments in simplified form from the last paper though (Harvard). Notice (if you read it) that it adds other important factors like return and volatility to accounting factors.

Requiring a Z score in the safe zone practically halves the market universe (654 stocks after eliminating financial sector as well) and is easier to implement. Interesting to look at. I won't implement it but I'll maybe look at the subject area a bit more seriously.


Don't forget: in addition to financial ruin (which is what we're talking about here), there's also manipulation and fraud to account for (and models that attempt to do that).

The peace of mind comes from: value works, even without accounting for financial ruin, manipulation, fraud, quality or financial strength/consistency. All those 5 areas are worth studying - and certainly quant models attempt to capture them all. I'm just saying that for me, peace of mind comes from knowing that value works without those factors. That's why I wouldn't equal weight them. i.e. Start with value (then you're in the real "safe zone") and play from there (can't go too wrong).

 

[systematic]

Thing is that for the vast majority of long shots it means exactly that...they wont win because the form says they can't, and the form is right, after all form is fact..its a study on what the horse has done and therefore is capable of.

...I was worried someone would say that, but it wasn't quite my point. Without the horse racing analogy: it shouldn't be surprising that value stocks (particularly "deep value") stocks look like the type of stock list that you'd be too embarrased to read out loud at your local investors club (or post on a forum!). But that's the point. If they ticked all the right boxes, everyone would love them. Hence my point: be careful about requiring your value stocks to tick all the right boxes. Graham apparently found the same thing (at least to the degree that his stocks were often unloved by the analysts).

My trading and wealth acquisition strategy is all based around time.

• Best time to enter (low price)
• Best time to average down (lower price)
• Best time to hold (do nothing)
• Best time to part sell (release capital)
• Best time to sell out

...Cool, I get that. It does read though that your strategy requires being very good with your timing ("best time").
My strategy: I'd rather not have to pick the best time, or the best stock - as I don't particularly trust myself very well to do either.

But besides that, do you think it worthwhile tracking the value price over time? Is that how you would decide when to enter?

The best time to buy SGH is gone, i however got a parcel at $1.505

Glad you got in at a good price. Graham's price still says value, hopefully that means more upside for you!

 

[systematic]

IMO, each company needs to be categorised using the criteria into either Defensive, Enterprising, Ok/NCAV and "Rubbish". Once you have categorised them correctly then calculate the graham price using the correct formula for the criteria.

Hey again Odds on, hadn't addressed this part.

That's what I had done with this list - didn't make it very clear, sorry.

This list is the Defensive list. The "PGP" uses the Graham price. I've simply provided a ratio of current price to the Graham price (to save the effort of looking up and comparing) and given it a TLA (Three Letter Acronym), lol


So as mentioned in my notes, I used 5 years for earnings and dividends, simply knowing that using 10 and 20 years respectively would restrict too much. So, that's rules 3 & 4.
I applied rules 2A and 2B as is. Current assets at least twice current liabilities, and Long-term debt not exceeding the net current assets.
Applied rule 5 re: earnings growth over 5 years instead of 10, as mentioned above).
Rule 1 (minimum revenues) mentioned in my notes. This is a bit like using a size factor, so listed the lot and mentioned where the cutoff could be (again, if you used 500m as mentioned, there probably wouldn't have been any selections, so we can settle for a lower figure on the ASX).

Rules 6 & 7, as you know, are covered by using the Graham price: sqrt. of the product of 22.5,EPS & BV.

You then have to compare current price to the Graham price anyway, so I did that inthe ratio: current price / graham price (smaller is better).


So this is the Defensive strategy of Graham's. I like it. Not sure why - I think it's the relation of the defensive strategy to the other 2 strategies.
This strategy allows for the highest price. The other strategies loosen up the criteria and therefore require a cheaper price. That idea just has a nice vibe to it.

Mind you, the defensive stocks are the easiest to manage, according to that site, and you can be the most aggresive with them (which makes sense): hence portfolios of only 10 stocks (which helps smaller investors too).

What surprised me a little was that 9 of the 19 were at a value price. Only that some simply are not liquid enough. Pity. But I suppose you could build a portfolio over time.

 

[systematic]

Rules 6 & 7, as you know, are covered by using the Graham price: sqrt. of the product of 22.5,EPS & BV.

You then have to compare current price to the Graham price anyway, so I did that inthe ratio: current price / graham price (smaller is better).

In other words: think of the PGP Ratio like a Price to Book ratio. a value of 1.00 means "fair value", i.e. the Graham Price.

Examples:
MNY is a Defensive stock, and currently trading at half the Graham Price
WLL is a Defensive stock, and currently trading right on the Graham Price
Expensive IRE is a Defensive stock, and currently trading over 3 times the Graham Price.

 

[craft]

Has anybody ever read Graham's postscript in the intelligent investor?

 

[RandR]

Has anybody ever read Graham's postscript in the intelligent investor?

Yes. its mostly just about the acquisition of geico. Also reinforces the point of making the right investment decisions with a simple methodology rather then a whole lot of 'average' decisions chasing mediocrity........ or is it ?

 

[craft]

Yes. its mostly just about the acquisition of geico. Also reinforces the point of making the right investment decisions with a simple methodology rather then a whole lot of 'average' decisions chasing mediocrity........ or is it ?

Postscript to The Intelligent Investor


By Benjamin Graham


"We know very well two partners who spent a good part of their lives handling their own and other people's funds in Wall Street. Some hard experience taught them it was better to be safe and careful rather than to try to make all the money in the world. They established a rather unique approach to security operations, which combined good profit possibilities with sound values. They avoided anything that appeared overpriced and were rather too quick to dispose of issues that had advanced to levels they deemed no longer attractive. Their portfolio was always well diversified, with more than a hundred different issues represented. In this way they did quite well through many years of ups and downs in the general market; they averaged about 20% per annum on the several millions of capital they had accepted for management, and their clients were well pleased with the results.

In the year in which the first edition of this book appeared an opportunity was offered to the partners' fund to purchase a half-interest in a growing enterprise. For some reason the industry did not have Wall Street appeal at the time and the deal had been turned down by quite a few important houses. But the pair was impressed by the company's possibilities; what was decisive for them was that the price was moderate in relation to current earnings and asset value. The partners went ahead with the acquisition, amounting in dollars to about one-fifth of their fund. They became closely identified with the new business interest, which prospered.

In fact it did so well that the price of its shares advanced to two hundred times or more the price paid for the half-interest. The advance far outstripped the actual growth in profits, and almost from the start the quotation appeared much too high in terms of the partners' own investment standards. But since they regarded the company as a sort of "family business," they continued to maintain a substantial ownership of the shares despite the spectacular price rise. A large number of participants in their funds did the same, and they became millionaires through their holding in this one enterprise, plus later-organized affiliates.

Ironically enough, the aggregate of profits accruing from this single investment-decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners' specialized fields, involving much investigation, endless pondering, and countless individual decisions.

Are there morals to this story of value to the intelligent investor? An obvious one is that there are several different ways to make and keep money in Wall Street. Another, not so obvious, is that one lucky break, or one supremely shrewd decision – can we tell them apart? – may count for more than a lifetime of journeyman efforts. But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplined capacity. One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door. One must have the means, the judgment, and the courage to take advantage of them.

Of course, we cannot promise a like spectacular experience to all intelligent investors who remain both prudent and alert through the years. We are not going to end with J. J. Raskob's slogan that we made fun of at the beginning: "Everybody can be rich." But interesting possibilities abound on the financial scene, and the intelligent and enterprising investor should be able to find both enjoyment and profit in this three-ring circus. Excitement is guaranteed."

 

[systematic]

I'd like to keep this thread focused on Ben Graham's stuff if possible.

I did have a quick look Oddson at the Z score in safe zone with 52wk lows....a bunch (about 34) of small / micro cap companies, nearly all in the materials sector.
To keep this thread on Graham, I won't post the list here...can you pm me odds-on if you want them?

 

[systematic]

Here we apply Graham's Enterprising method, which essentially:
(a) loosens up the criteria a little, and
(b) demands a 'more value' price for doing so...

we get the 19 stocks included above (of course), which I've removed, along with an additional 7 stocks listed below.

The "PEP" is the "Price to Enterprising Price" ratio. Like a price to book, 1.00 is neutral, less than 1 is value. Only in this case, a value of 1.00 is the Graham Enterprising price.

Sadly, no value to be had. The closest would be SDM, and that would have to fall to around 80c...

​

Once again sorted by revenues.

 

[systematic]

And for completeness, Graham's Bargain Issues.
Value here, but (to be expected with these stocks), mostly impossible to trade.
Maybe BND out of all of them? PPP possibly for a small play?
Sorted by market cap this time, not revenues (as irrelevant to this method).

​

 

[odds-on]

The first screen you mention doesn't really strike me as a value screen.

Perhaps a quality + growth screen?

David Dreman

I am a fan

The next screen you mention with Price to Sales is close to what I do.

You do not have to give all your secrets away but I would be interested what you have found works and does not work on the ASX. I currently do not use a mechanical investing system but am very tempted. Would definitely appreciate advise on portfolio management.

You just have to be so careful about adding more into simple models, otherwise they don't remain simple - and that is not what you want, in my opinion

Agree simple works. I have read that Graham's last will was to use just Earnings Yield and Tangible Book to Liabilities.

Check out this link where they refine some of the Graham criteria

http://www.oldschoolvalue.com/blog/investing-strategy/graham-guru-stock-value-screen/

They are plenty of other screener backtests on this site - check out the CROIC screener $$$$$$$$

The final screen - whoa, you'll have the trend followers coming after you, lol. But seriously, 52wk lows, I wouldn't use it as a factor at all. Not really correlated with value (in the way longer term negative return is). And definitely not a momentum factor!

Altman Z - I've not bothered with a risk of bankruptcy score, but recently been looking at it (a little).
Firstly, I presume you meant "minimum" grey area (i.e. safe area is okay too?)

Ok I was being a little silly here but it would be interesting to see the performance of stock selection if you went completely against what made logical sense. Search for expensive and highly leveraged. To keep it Graham and simple:
- Earnings yield less than 2/3rd of AAA government bond yield
- No limit on the debt

As for the Altman Z score if you break the formula down you will see it is more or less Graham type criteria presented another way. The Altman Z score measures working capital, cumulative profitability, recent profitability and so on. Just gives you one nice number to work with.

http://www.oldschoolvalue.com/blog/investing-strategy/altman-screen-performance/

Cheers

odds-on

 

[odds-on]

Hey again Odds on, hadn't addressed this part.

That's what I had done with this list - didn't make it very clear, sorry.

This list is the Defensive list. The "PGP" uses the Graham price. I've simply provided a ratio of current price to the Graham price (to save the effort of looking up and comparing) and given it a TLA (Three Letter Acronym), lol


So as mentioned in my notes, I used 5 years for earnings and dividends, simply knowing that using 10 and 20 years respectively would restrict too much. So, that's rules 3 & 4.
I applied rules 2A and 2B as is. Current assets at least twice current liabilities, and Long-term debt not exceeding the net current assets.
Applied rule 5 re: earnings growth over 5 years instead of 10, as mentioned above).
Rule 1 (minimum revenues) mentioned in my notes. This is a bit like using a size factor, so listed the lot and mentioned where the cutoff could be (again, if you used 500m as mentioned, there probably wouldn't have been any selections, so we can settle for a lower figure on the ASX).

Rules 6 & 7, as you know, are covered by using the Graham price: sqrt. of the product of 22.5,EPS & BV.

You then have to compare current price to the Graham price anyway, so I did that inthe ratio: current price / graham price (smaller is better).


So this is the Defensive strategy of Graham's. I like it. Not sure why - I think it's the relation of the defensive strategy to the other 2 strategies.
This strategy allows for the highest price. The other strategies loosen up the criteria and therefore require a cheaper price. That idea just has a nice vibe to it.

Mind you, the defensive stocks are the easiest to manage, according to that site, and you can be the most aggresive with them (which makes sense): hence portfolios of only 10 stocks (which helps smaller investors too).

What surprised me a little was that 9 of the 19 were at a value price. Only that some simply are not liquid enough. Pity. But I suppose you could build a portfolio over time.

IMO, the Defensive criteria is supposed to be defensive. For me this means 10+ years without a loss or a missed dividend. You could probably remove the current ratio criteria as it is specific to the business/industry, see below:

http://www.creditguru.com/ratios/inr.htm

A modified defensive criteria :

-10 years of earnings
-10 years of dividends
-10 year average ROE of at least 15%
-Revenue and earnings growth

It would be interesting to see how many companies pass the above test. The safety criteria would have to be done on a case by case basis.

Cheers

odds-on

 

[odds-on]

Another, not so obvious, is that one lucky break, or one supremely shrewd decision – can we tell them apart?

Worth discussion on another thread.