Eighty-seven years after he published his seminal work, Benjamin Graham remains the patron saint of value investors.
Graham – a hedge fund manager, Columbia University professor and author -- believed that a stock’s price orbits its “intrinsic value” the way a planet orbits the sun. It may get further away or closer, but always is drawn back toward that center of gravity.
Intrinsic value can be measured in a variety of ways. The two most important to Graham were book value (a company’s assets minus liabilities, or corporate net worth, divided by the number of shares) and earnings (profits).
He co-authored "Security Analysis"(1934) with David Dodd, wrote "The Intelligent Investor"(1949) and remained influential until his death in 1976.
Graham hasn’t trod the earth in 45 years, but many financial professionals continue to pay him homage. For my part, each year I compile a list of a few stocks I believe Graham would like if he were alive.
The record
My picks channeling the spirit of Graham have achieved an average 12-month return of 18.4%, well ahead of the 12.6% average for the Standard & Poor’s 500. Those figures are for 18 columns I’ve written on this subject beginning in 2001.
Twelve of the 18 columns have been profitable, and 13 have beaten the S&P 500.
My picks from a year ago were Mohawk Industries Inc. (MHK, Financial), up 122%, MetLife Inc. (MET, Financial), up 61%, Graham Holdings Co. (GHC, Financial), up 52%, and Central Securities Corp. (CET, Financial), up 20%. Collectively, those four stocks returned 63.7%, beating the S&P 500, which returned a handsome 34.1%.
Bear in mind that my column results are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
What would the master like in today’s pricey market? Here are four stocks I think he would favor.
Loews
Loews Corp. (L, Financial), a New York City-based holding company run by the Tisch family, operates a constellation of businesses that change over time.
Its biggest unit is CNA Financial Corp. (CNA, Financial), a property and casualty insurer. It also runs Loews hotels and Boardwalk Pipeline Partners (BWP, Financial), and holds a big stake in Diamond Offshore Drilling Inc. (DOFSQ, Financial).
The stock has been a laggard, and sells for only 10 times earnings. But it has the highest possible Piotroski score (nine out of nine), a measure designed to find value situations where the fundamentals are improving.
Citizens Financial
Citizens Financial Group Inc. (CFG, Financial), with headquarters in Providence, Rhode Island, operates Citizens Bank, which has about 1,000 branches in New England, the Mid-Atlantic states and parts of the Midwest. It was a unit of the Royal Bank of Scotland, but has been independent since 2014.
After losing money in 2013, the banking company has shown seven straight years of profits. Those profits are unspectacular, but to compensate, the stock sells for 10 times earnings and 0.9 times book value in a market where the prevailing multiples are more than double that.
Kelly Services
Kelly Services Inc. (KELYA, Financial), out of Troy, Michigan, is a staffing company best known for providing businesses with temporary workers.
Who needs temps during a pandemic, when so many offices are urging people to stay at home? That’s why Kelly shares go for only eight times recent earnings. Analysts expect earnings to fall in the coming year.
Graham was astute in distinguishing temporary problems from more lasting ones. I think he would view Kelly’s troubles as temporary.
Argonaut Gold
The most speculative pick I’ll make today on Graham’s behalf is Argonaut Inc., Inc. (ARNGF, Financial), a small ($700 million market value) gold mining company incorporated in Canada but with offices in Reno, Nevada. It has three mines in Mexico and one in Nevada.
With interest rates low, and with governments around the world running deficits, I think the climate for gold is good this year and next. Argonaut shares fetch only eight times earnings and 0.8 times book value. So they are attractive to a cheapskate like me – or Graham.
The criteria
To make my picks in Graham’s name, I use a simplified version of his criteria. To be considered, a stock must:
- Sell for 12 times the company’s earnings, or less.
- Sell for less than stated book value.
- Sell for less than 1.5 times tangible book value (corporate net worth excluding intangibles such as goodwill).
- Have debt no more than 50% of stockholders’ equity.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
