3 Graham's Lost Formula Picks to Consider for the New Year

These stocks recently qualified for the screener

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Jan 05, 2023
Summary
  • The formula was developed before Graham's death.
  • Sabine Royalty Trust, Fate Therapeutics and Iovance Biotherapeutics could offer good value for 2023.
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After ending 2022 on a low note, U.S. market indexes continued to sink on Thursday morning after jobs data showed the labor market is still hot despite the Federal Reserve’s attempts to curb inflation. According to CNBC, the ADP private payrolls report indicated employers added 235,000 jobs in December, which was higher than economists’ estimates.

The data is concerning to investors as they are looking for signs that the Federal Reserve can potentially begin slowing down interest rate hikes in 2023.

As a result, the Dow Jones Industrial Average fell 274 points, or 0.72%, while the S&P 500 Index declined 0.62% and the Nasdaq Composite slid 0.72%.

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Despite these developments, as we head into a new year, investors may be interested in potential opportunities among companies that qualify for Benjamin Graham’s Lost Formula screen, a Premium GuruFocus feature.

Prior to his death in 1976, the legendary investor who authored "Security Analysis" and "The Intelligent Investor" developed a refined formula that screened for companies with a price-earnings ratio of less than 10 and an equity-to-asset ratio of at least 0.5. The formula got its name from the fact he was unable to publish it before his passing; therefore, it was lost from public knowledge for a time.

A backtest of the strategy from 1926 to 1976 showed it would have outperformed the Dow benchmark by approximately twice as much.

The screener found new companies with market caps above $1 billion that met the criteria as of Jan. 5 were Sabine Royalty Trust (SBR, Financial), Fate Therapeutics Inc. (FATE, Financial) and Iovance Biotherapeutics Inc. (IOVA, Financial).

Sabine Royalty Trust

Sabine Royalty Trust (SBR, Financial) has a $1.12 billion market cap; its shares were trading around $76.80 on Thursday with a price-earnings ratio of 9.97, a price-book ratio of 65.81, a price-sales ratio of 9.68 and an equity-to-asset ratio of 0.83.

Founded in 1982, the Dallas-based company holds royalty and mineral interests for a number of producing oil and gas properties in the U.S.

The GF Value Line suggests the stock is modestly undervalued currently based on its historical ratios, past financial performance and analysts’ future earnings estimates.

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The GF Score of 88 out of 100 indicates the company is expected to have good outperformance potential, driven by high ratings for profitability, financial strength, GF Value and growth. Momentum, however, received a low rank.

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The company also has no long-term debt and a high Altman Z-Score of 212.27. It is creating value as it grows since the return on invested capital eclipses the weighted average cost of capital. Further, Sabine has an expanding operation margin and a predictability rank of one out of five stars. According to GuruFocus research, companies with this rank return an average of 1.1% annually over a 10-year period.

Of the gurus invested in Sabine Royalty Trust, Chuck Royce (Trades, Portfolio) has the largest position with 0.36% of its outstanding shares. Murray Stahl (Trades, Portfolio) also owns the stock.

Fate Therapeutics

Fate Therapeutics (FATE, Financial) has a market cap of $1.08 billion; its shares were trading around $11.12 on Thursday with a price-book ratio of 2.09, a price-sales ratio of 14.13 and an equity-to-asset ratio of 0.69.

Headquartered in La Jolla, California, the clinical-stage biopharmaceutical company develops cellular immunotherapies for people with cancer and immune disorders. It was founded in 2007.

According to the GF Value Line, the stock, while undervalued, is a possible value trap currently. As such, potential investors should be sure to do thorough research before making a decision.

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The GF Score of 68, however, means the company has poor future performance potential. While Fate Therapeutics raked in a high rating for growth, the financial strength and momentum ranks were more moderate. Profitability and GF Value received low grades.

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Despite being supported by a comfortable level of interest coverage, the Altman Z-Score of 0.19 warns the company could be at risk of bankruptcy. Further, it may be becoming less efficient since assets are building up at a faster rate than revenue is growing. Fate also has an expanding operating margin, a low Piotroski F-Score of 2 out of 9, meaning business conditions are in poor shape, and a one-star predictability rank.

With a 12.02% stake, Catherine Wood (Trades, Portfolio) is Fate Therapeutics’ largest guru shareholder. Other guru investors are Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Robert Bruce (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Baillie Gifford (Trades, Portfolio).

Iovance Biotherapeutics

Iovance Biotherapeutics (IOVA, Financial) has a $1.01 billion market cap; its shares were trading around $6.39 on Thursday with a price-book ratio of 2.56 and an equity-to-asset ratio of 0.72.

Established in 2007, the San Carlos, California-based company develops tumor-infiltrating lymphocyte therapies to treat cancer.

Although Iovance has been a public company for quite some time, there is currently not enough historical data to generate a GF Value Line. However, the stock has tumbled more than 60% over the past year.

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Based on its low GF Score of 37, the company appears to have poor performance potential. It has a high rating for financial strength, but low ranks for profitability and momentum. Since there are no ratings for GF Value or growth, however, the score may not accurately reflect the company’s full potential.

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Although Iovance has adequate interest coverage, the Piotroski F-Score is low at 1. It also has a one-star predictability rank.

Wood is Iovance Biotherapeutics’ largest guru shareholder with 1.47% of its outstanding shares. The stock is also being held by Simons’ firm and Jones.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure