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This is an April 21,1947, photo of Benjamin Graham, the father of value investing. (AP)
This is an April 21,1947, photo of Benjamin Graham, the father of value investing. (AP)

NUMBER CRUNCHER

A Benjamin Graham-inspired value portfolio (with caveats) Add to ...

What are we looking for?

A Benjamin Graham-style strategy that may – emphasis on the “may” – provide 15-per-cent-a-year returns.

Mr. Graham, the father of value investing, learned how to spot undervalued stocks during the darkest days of the Great Depression. As the years went by, he became a fan of an extraordinarily simple approach to picking a basket of stocks.

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According to Greenbackd.com, a blog that explores various deep value and contrarian strategies, Mr. Graham recommended that investors create a portfolio of at least 30 U.S. stocks with price-to-earnings ratios below 10 and debt-to-equity ratios of less than 50 per cent. He suggested they hold each stock until it returned 50 per cent or, if it failed to meet that target, sell it by the end of the second calendar year from the time of purchase. Speaking in 1976, Mr. Graham calculated that his strategy had returned about 15 per cent a year for the previous 50 years.

“He cautioned, however, that an investor should not expect 15 per cent every year,” writes Tobias Carlisle of Greenbackd. “The minimum period of time to determine the likely performance of the strategy was five years.”

How we did it

We emulated Mr. Graham’s approach by using our Bloomberg terminal to look for stocks listed on the Toronto Stock Exchange with price-to-earnings ratios of less than 10 and debt-to-equity ratios of less than 50 per cent. To avoid smaller, riskier stocks, we also insisted that each stock had to have a market capitalization of at least $200-million.

What we found

Twenty stocks passed our screen – not enough for a full portfolio by Mr. Graham’s standards. And dangers abound.

For instance, the high proportion of energy and resource companies in our roster suggests that anyone buying this portfolio would be concentrating their bets on a relatively tiny slice of the global economy.

So caution is definitely in order. But those who are intrigued by Mr. Graham’s methods may want to do their own research on some of the firms listed here.

If history is any guide, at least some of these cheap stocks should produce big returns.

Follow on Twitter: @IanMcGugan

 

A Benjamin Graham-style screen for Canadian stocks

Company Ticker Market
Cap
($-mil)
P/E
Agrium Inc. AGU-T 13,285.3 9.61
Canadian Oil Sands COS-T 9,739.7 9.98
Kinross Gold K-T 6,761.6 4.26
Genworth MI MIC-T 2,729.8 8.14
Western Forest WEF-T 885.2 9.90
Nevsun Resources NSU-T 686.6 8.33
Ithaca Energy IAE-T 576.9 4.55
Major Drilling MDI-T 566.8 9.51
Transglobe Energy TGL-T 518.7 7.74
Torstar Corp. -B TS.B-T 473.7 5.29

Source: Bloomberg

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  • AGU-T
  • COS-T
  • K-T
  • MIC-T
  • WEF-T
  • NSU-T
  • IAE-T
  • MDI-T
  • TGL-T
  • TS.B-T
  • TBE-T
  • TOG-T
  • TMM-T
  • SEC-T
  • HNZ.A-T
  • LII-T
  • AKT.A-T
  • LGT.A-T
  • RME-T
  • AAH-T
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