Friday, November 28, 2008

40 Value Stocks that Graham Would Buy

Ben Graham, the father of Value Investing and teacher of Warren Buffett, was also a successful investor in 20th century. The four bread and butter strategies, employed by his firm, the Graham-Newman corporation between 1926 and 1956 included arbitrages, related hedges, liquidations and Net-Current-Asset or Bargain issues. Today I will provide a brief overview of the Bargain Issues strategy and provide some current stock picks.

The main goal with the bargain issues was to purchase shares in companies for less than two thirds of their asset values at prices that a private owner might pay at an acquisition. The fact that investors paid less than two thirds of the net working capital for the bargain stocks provided a margin of safety to those shareholders. Furthermore Graham-Newman strived to maintain a diversified portfolio of these Net Current Asset stocks, sometimes holding as much as one hundred of those issues which were worth considerably more than what they are selling for. Experience had taught Graham that few stocks are ultimately worth less than their net current assets minus the total liabilities.
Using this screen from GrahamInvestor.com site I came out with the following list of 40 bargain stocks ( You could also open the list from this link):


It’s interesting to note that there are two builders – Beazer Homes and Standard Pacific. It’s definitely suspect whether their inventories could be sold at the levels that they keep on their books. The rest of the issues include stocks with low trading volumes. Furthermore most of the stocks on the list are losing money. It would be interesting to see how these enterprises perform over the next two years.

Full Disclosure: None

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8 comments:

  1. DGI,

    That is an interesting but jumbled site. The intermixture of thinly traded stocks renders the screen and its list of stocks useless without considerable further work and interpretation. Most important, I note that although they have a "Performance" tab, they last updated their performance in September, 2007.

    Dave

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  2. Thanks for submitting this post for the upcoming Festival of Stocks. Please consider supporting the Festival of Stocks by volunteering to host an upcoming edition. See http://www.valueinvestingnews.com/festival-of-stocks for details. Contact me if you can help.

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  3. Dave,

    The 40 stocks in the list are from a strategy that Ben Graham used to employ for years, which apparently made him double digit returns for many years. I would like to see if the group as a whole outpeforms the market over the next 2 years.

    I do agree that the stocks are thinly traded, which is probably why they are so undervalued in the first place.

    George,

    I am considering hosting the Festival. Thanks for the heads up!

    ReplyDelete
  4. DGI,

    I have a basic question about NET-NETS. How do you define Total Liabilities??

    Kaushal

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  5. Kashah,

    I add all current and long term liabilities for that amount.

    ReplyDelete
  6. I think it is an insult to Graham to assume that he would invest in these stocks based on a few simple indicators. A 2 minute look at the most recent quarterly of the first, and only, stock on the list that I looked at, ASFI, reveals what a terrible position the company is in. The company purchases non performing consumer receivables. It has about $500MM of these receivables which it calls assets. Additionally, the company holds 2.8MM in cash and 3.8 in restricted cash. Additionally, the company has $250MM in debt. A VERY conservative estimate of interest payments would be $12MM a year. There you have it. The company will soon be out of cash and will have to sell its so called half billion dollars in asset for five to ten cents on the dollar, as no one would pay more in this economy. Just to pay this years interest payments they lose $80MM-$160MM of their so called assets. Even in good conditions you can not assume the $500MM is worth anywhere near that. Graham would call purchasing this stock a speculation rather than an investment. It is more important to understand Grahams philosophy than his indicators. That is why Warren Buffet has declared Grahams book, The Intelligent Investor, as the greatest book on investing and not his other book, Security Analysis. I recommend you read both. He states very clearly, numerous times, that you must very carefully analyze the spreadsheets and publications of any company before investing in it. The indicators are just a good way to begin your search. In fact, he states if you are not going to put in the effort and time to fully analyze a company before buying it, you are best off buying a handful of time tested, major US companies with stable earnings and an acceptable price rather than stock picking. You should not spread information like this to others unless you fully understand what you are talking about yourself. You may cause others to lose wealth. Try to learn, let Graham be the teacher.

    ReplyDelete
  7. JDI,

    The 40 stock list is not a recommendation to buy. As a matter of fact however, in his book " The Intelligent Investor" Graham mentions how a portfolio of net-nets has outperformed the market for many years. Furthermore he provides a detailed example containing many net-nets from 1957 to 1959 and claims that this list has outperformed the market.

    While his methods could be subject to anyones interpretation, I will tell you for a fact to go re-read the book you are so viciously trying to show I haven't read yourself and see his examples of the strategy all over the book. Graham mentions on several occasions how a portfolio of stocks trading below their ncav has outperformed the markets.

    Now i do agree with you that blindly purchasing a portfolio fo stocks without any research is not a good idea.

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  8. Hi, I recently discovered your blog, and enjoy it very much. You might like to know that as at 19 February 2013, not including dividends, this portfolio would have returned the equivalent of 22% p.a. since your post.
    JDI411 might like to note, that ASFI has experienced growth of 97% p.a. since your post!
    Graham did mention how proper diversification was an important part of this strategy. Of your 40 stocks 12 have declined in value, of which 4 have reduced to zero or effectively zero such as LKI. Very interesting result!

    ReplyDelete

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