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Number Cruncher

Hunting for value in Africa with Ben Graham Add to ...

What are we looking for?

South African stocks that would appeal to Benjamin Graham.

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Benjamin Graham, the famed father of value investing, developed his bargain-hunting philosophy on Wall Street during the darkest days of the 1930s. He stressed buying cheap stocks with a margin of safety.

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Many contemporary stock screens attempt to find investments that would be to Mr. Graham's liking. However, most Graham-style screens restrict their search to Canadian or U.S. stocks.

But why stop there? This week, we're going on tour and looking overseas for potential bargains. Earlier this week we went shopping in Britain and Australia. Today, we're exploring South Africa - a country that carries more political risk than our other destinations but also serves as an entry point into the vast potential of a developing continent.

To find South African investments that might appeal to a classic value investor, we screened the Johannesburg Stock Exchange for stocks that trade for less than 12 times earnings and for under 1.5 times tangible book.

To reduce the risk that goes with small or highly leveraged firms, we insisted that companies must have total debt less than half their equity and market capitalizations of half a billion South African rand or more.

What did we find?

A dozen companies met our criteria, none of them with a North American profile. Many are small to mid-sized firms. (When looking at market caps and stock prices, keep in mind that one loonie is worth about seven South African rand.)

One of the larger enterprises on the list is Telkom SA, Africa's largest integrated communications company. Like most other phone companies around the world, it faces challenges from new technology and new competitors, but it does pay an attractive 3.4-per-cent dividend yield.

Afrimat is a pipsqueak by comparison, but the supplier of building materials offers an even more tempting dividend of more than 4 per cent.

Also worthy of note is Aveng, a company with wide-ranging interests in construction and steel processing. It pays a 4-per-cent dividend.

As always, investors should do their own research before buying any of these stocks. Among the risk factors to consider is the South African economy. Unemployment is hovering around 25 per cent, and much of the country's infrastructure is out of date.

On the other hand, Wal-Mart's recent purchase of South African retailer Massmart shows that global companies are eager to find an African foothold. The stocks listed here provide some starting points for individual investors who want to begin researching their own foray into the continent.

Follow on Twitter: @IanMcGugan

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