The Globe and Mail

WHAT ARE WE LOOKING FOR?

Stock market slumps aren't all bad. For value investors, they're better than Christmas. So today we'll try to emulate the strategy of the late, great Benjamin Graham, known as the father of value investing.

WHY BEN GRAHAM, WHY NOW?

Mr. Graham was all about buying stocks at a steep discount to their intrinsic value and holding them for the long haul. He came up with the concept of “Mr. Market” to describe the emotional ups and downs that drive the short-term swings in stock prices.

The value investor's job is to decide when Mr. Market is behaving irrationally and offering stocks for less than their true worth. This provides a “margin of safety” to the purchaser.

In his influential book, The Intelligent Investor, Mr. Graham recommended focusing on companies with little debt, a long history of uninterrupted dividend payments and relatively low price-to-earnings ratios.

TODAY'S SCREEN

We'll use the Graham Value Investor screen developed by Validea.com and available at nasdaq.com/reference/GURU.STM. The screen looks for stocks with the following attributes.

-Current assets must be at least double current liabilities, and long-term debt must not exceed net current assets (current assets minus current liabilities).

-Earnings per share must have grown by at least 30 per cent over the past 10 years (we're referring here to total earnings growth, not an annual average). And the company must not have posted a loss in any of the past five years.

-The current price/earnings ratio and the P/E based on average earnings of the past three years must be 15 or less. As well, the price-to-book ratio multiplied by the P/E must be less than 22.

WHAT WE TURNED UP

Before we get to the results of today's screen, a few words about how the strategy has performed in the past.
 
Validea.com's Benjamin Graham model portfolio has produced a 17.7-per-cent average annual return since its inception in July, 2003. That thrashes the S&P 500's 4.4-per-cent average gain.

The Graham portfolio, which is rebalanced annually, also handily beat all 10 other guru portfolios tracked by validea.com.

Over the past 12 months, however, it's down 6.2 per cent, but that still beats the 17.8-per-cent loss for the S&P 500.

Today's screen produced a diverse mix of companies. There's a women's clothing retailer (Charlotte Russe), children's book publisher (Scholastic) and an ambulance and fire engine maker (Spartan Motors).
 
There's even a company (Jakks Pacific) that makes action figures based on World Wrestling Entertainment characters, which is only fitting given the body slam the stock market has endured these past few weeks.

• Table: View result set