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Rupert Hargreaves
Rupert Hargreaves
Articles (773)  | Author's Website |

3 Enterprising Investor Stocks Worth a Closer Look

Each meets Graham's famous criteria

September 17, 2018 | About:

Last week I put together an article titled, "5 Deep-Value Stocks Worth a Closer Look." This list was just a rough guide to five deep value stocks that are currently trading at a discount to net asset value.

I have compiled a more structured analysis of some equities, using the screen developed by Benjamin Graham. Often referred to as the "Last Will" of Benjamin Graham, this list was put together with the help of aeronautical engineer James Rea, and it is a simple 10-point checklist for investors to use when analyzing securities. Here's a slightly adjusted list in full:

  1. An earnings-to-price yield at least twice the AAA bond rate.
  2. Price-earnings ratio less than 40% of the highest price-earnings ratio the stock had over the past five years.
  3. Dividend yield of at least two-thirds the AAA bond yield.
  4. Stock price below two-thirds of tangible book value per share.
  5. Stock price below two-thirds of net current asset value.
  6. Total debt less than book value.
  7. Current ratio great than 2.
  8. Total debt less than two times net current asset value.
  9. Earnings growth of prior 10 years at least at a 7% annual compound rate.
  10. Stability of growth of earnings in that no more than two declines of 5% or more in year-end earnings in the prior 10 years are permissible.

Finding companies that meet all of these criteria today is quite difficult, so for my list, I have adjusted the qualifying limit to seven or more of the 10 points. There's no particular criteria I have excluded from the list. As long as each firm meets at least eight of the 10 points listed above, I am willing to consider it.

For the purposes of this article, my AAA bond yield will be marked at 3%, slightly above the current 10-year Treasury yield. I will also be using six-year financial data, not the requisite 10. I should state also that this is designed to be just a starting point for further research.

Enterprising investor stocks

The first company to qualify is HanesBrands Inc. (NYSE:HBI). At the time of writing, this company has an earnings yield of 7.9%, easily above my benchmark 3% yield. The price-earnings ratio on a forward basis is 10, which is 70% below the five-year high of 34. A dividend yield of 3.5% ticks off criteria number three.

Unfortunately, where the company falls down is on the book value front. It does not meet criteria number four or five. Still, its total debt is more than book value, and the current ratio is just over two. Meanwhile, earnings per share have grown at a compound annual rate of 19.5% over the past six years and in only one of the past six years has earnings per share declined.

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One company that does meet the book value criteria is Kansas City Life Insurance Co. (KCLI). With an earnings yield of 13% and a price-earnings of 8.6, compared to its five-year high of 22, the stock sails through the first two criteria.

Unfortunately, with a dividend yield of 2.6%, it just misses criterion number three. The price to tangible book value sits at 0.6. With virtually all assets tied up in long-term investments supporting the insurance business, the company misses criteria five as well. Nevertheless, with a net cash position on the balance sheet, and negligible short-term liabilities, the company easily meets six, seven and eight. 

Last, earnings growth has averaged just under 8% for the last six years with no sudden drops.

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The final stock is Miller Industries Inc. (NYSE:MLR). With an earnings yield of 7.7%, this stock passes criterion No. 1 with ease. Its current price-earnings ratio of 10 is also more than 50% below the five-year high of 26.3.

The dividend yield just scrapes through criterion three. Miller yields 2.6% compared to the U.S. 10-year rate of 3%. Unfortunately, the stock is trading at a price-book value of 1.5, so it does not meet criteria four and five. However, with no debt and a current ratio of 2.1, it sails through the next three points on the list.

Last, over the past six years, earnings growth has averaged 20% per annum and there have been no significant declines in earnings per share, indicating income stability.

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Disclosure: The author owns no share mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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