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Senior project manager Patrick Pritchard invests in undervalued stocks using an approach based on Benjamin Graham's book, The Intelligent Investor. (cacaroot/Getty Images/iStockphoto)
Senior project manager Patrick Pritchard invests in undervalued stocks using an approach based on Benjamin Graham's book, The Intelligent Investor. (cacaroot/Getty Images/iStockphoto)

me and my money

Investor’s stock picks guided by the ‘Graham number’ Add to ...

Patrick Pritchard

Occupation

Senior project manager with a major financial firm

The portfolio

About 40 positions, the largest being Bank of Montreal, Atco Ltd., Logistec Corp., and High Liner Foods Inc. Also includes exchange-traded funds.

The investor

Patrick Pritchard began investing in 2004, buying stocks recommended in magazine articles and by investment advisers. In 2010, he began doing his own research. His first pick, High Liner Foods Inc., has since “gone up 126 per cent … and increased its dividend 86 per cent.”

How he invests

Mr. Pritchard invests in undervalued stocks using an approach based on Benjamin Graham’s book, The Intelligent Investor. Specifically, he looks for five-plus years of dividend growth, 10-plus years of earnings-per-share growth and “a Graham number that indicates undervaluation.”

The Graham number has its origin in Mr. Graham’s view that investors should scout for opportunities among undervalued companies identified by: 1) price-to-earnings ratios below 15; and 2) price-to-book-value ratios below 1.5.

Some companies may meet both conditions, but what about those that meet only one? Many investors think they could be included if the ratio greater than one boundary is offset by the ratio less than another boundary.

The Graham number is calculated by multiplying the boundaries (15 times 1.5) of the ratios to get 22.5. For example, it allows a company to be classified as undervalued if the price-to-earnings ratio is 22 and price-to-book-value ratio is 1.0 or less (22 times 1.0 being less than 22.5).

A company on Mr. Pritchard’s radar is car-parts manufacturer, Magna International Inc. Its Graham number is significantly below 22.5 and the dividend (yielding 2.5 per cent) looks quite secure: It’s financed by less than 25 per cent of company earnings.

Best move

“CCL Industries, which I picked up when it was undervalued in 2012, and subsequently sold for a 517-per-cent gain in 2016,” says Mr. Pritchard.

Worst move

It was buying stock recommendations without doing his own research. Two examples of the big losers are: Western One Inc. (lost 99 per cent) and Yellow Pages Ltd. (lost 99 per cent). He still owns them since the commission to sell would exceed the proceeds. These losers in his account are “a constant reminder to do my own research and not follow the hot trend,” he notes.

Advice

“For those who don’t have the time to do their own research, the best thing you can do is to invest in the broad market through low-cost ETFs,” Mr. Pritchard advises.

Want to be in Me and My Money? Contact Larry MacDonald at mccolumn@yahoo.com.

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