Nearly eight decades after Benjamin Graham, the godfather of value investing, first laid out his value philosophy, most of today’s value investors have little in common with the originator of the style.
Benjamin Graham’s style of value investing was based upon buying stocks trading at a deep discount to net asset values. When Graham first came up with the style, financial information was not widely disseminated, so it was easy for an investor (who was willing to put in the extra effort) to get ahead of the market. But today, financial information is readily available and deep value investing has almost entirely died out. Companies that qualify as value investments are quickly bid by market participants, who can quickly find these opportunities via automated stock screeners and stock blogs. Most so-called value investors nowadays work off intrinsic value. They are looking for stocks trading at a discount to intrinsic value offering a so-called margin of safety.
However, there are a few traditional value investors still out there, though they are difficult to find. Jean Marier and Tim McElvaine, who run the Victoria-based McElvaine Investment Trust, are two of the last remaining Grahamites.
The McElvaine Investment Trust
The McElvaine Investment Trust is around 30% in cash today as the fund’s managers are struggling to find any opportunities in the current market, which should not come as a surprise. Unfortunately, the trust has struggled over the past few years, tarring its enviable long-term record. Over the past 20 years, the fund has returned about 7% per annum. Since 2006, the fund has lost 2.8% per annum. Over the previous five years, the return was 7% per year and the fund is up 2.1% year to date.
On Morningstar’s website, the investment objective and strategy of the trust is described as “to act only when there is sufficient difference between what you are getting and what you are paying: a margin of safety." This is a true hat tip to the fund’s Graham legacy.
Still, looking through the fund’s portfolio, it would appear that the managers have deviated slightly from Graham’s desire to hold a basket of 30 or more securities trading at a deep discount to net assets. For a start, the top 10 portfolio holdings account for 70.7% of holdings excluding cash. That said, the second-largest holding, accounting for 12% of the portfolio, is a convertible debenture from Rainmaker Entertainment Inc. (TSXV:RNK, Financial) that yields 8%.
A look at the value stocks
The biggest position, accounting for 12.6% of the investment portfolio, is Glacier Media Inc. (TSX:GVC, Financial), a penny stock with a market capitalization of 76 million Canadian dollars ($56.9 million) and an enterprise value of CA$130 million. The company’s forward price-earnings (P/E) ratio is 9.9, the price-sales (P/S) ratio is 0.4 and the price-book (P/B) ratio is 0.6. The company has CA$4.6 million in cash and CA$56 million in debt. Glacier calls itself a B2B market analysis and data provider.
Carmanah Technologies Corp. (TSX:CMH, Financial) is McElvaine’s third-largest portfolio position coming in at 9.1% of the investment portfolio. Carmanah manufactures industrial grade solar LED lights and solar power systems. This is another penny stock with a market capitalization of less than CA$100 million, a forward P/E of 21.8 and a P/B ratio of 1.4. The company has just under CA$21 million of cash on its balance sheet, or 84 cents per share, and total debt of CA$10.6 million.
The fourth and fifth-largest positions, coming in at 6.6% and 6.1% of the portfolio respectively, are Maxim Power Corp.Ă‚ (TSX:MXG, Financial) andLeucadia National (Trades, Portfolio) Corp.Ă‚ (LUK, Financial).
Maxim is an Independent Power Producer engaged in the acquisition, development, ownership and operation of power generation facilities. At the beginning of June, the company warned there is “significant doubt” it can continue as there is growing concern about record-low Alberta electricity prices. Leucadia National (Trades, Portfolio) is a diversified holding company whose shares compounded at 19% a year from 1979 to 2012. The company has struggled in recent times as the group’s financial interests have come under pressure from low interest rates.
Disclosure: The author does not own any stock mentioned within this article.
Start a free 7-day trial of Premium Membership to GuruFocus.
