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 an increasing fan of an extraordinarily simple approach to picking a basket of stocks.
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 $200-million.
What we found
Twenty-eight stocks passed our screen – nearly enough for a full portfolio by Mr. Graham’s standards. But dangers abound. For instance, the high proportion of energy companies in our roster suggests that anyone buying this portfolio would be concentrating their bets on a relatively tiny slice of the global economy.
For now, we suggest caution. But we intend to come back to this portfolio from time to time and see whether Mr. Graham’s time-honoured strategy is still working.
Value screen emulates Benjamin Graham's approach
|Company||Ticker||Market cap ($-mil)||P/E|
|Alacer Gold Corp.||ASR-T||1,328.20||7.48|
|High River Gold||HRG-T||1,167.90||6.62|
|Company||Ticker||Market cap ($-mil)||P/E||Debt/Equity LF||$ Price (Jan. 16)||Total % Return YTD||Revenue Trailing 12-mo. ($-mil)|
|Alacer Gold Corp.||ASR-T||1,328.20||7.48||4.46||4.61||-11.35||721.2|
|High River Gold||HRG-T||1,167.90||6.62||1.12||1.39||0.72||619.1|
|Twin Butte Energy||TBE-T||661.8||4.85||35.35||2.58||0||202.4|
|Total Energy Svc.||TOT-T||455.1||8.38||24.67||15||0.07||326.2|
|HNZ Group Inc.||HNZ.A-T||281.1||6.02||23.99||21.5||-0.46||264|