This Low Expectation Screen is Outperforming by 13% YTD


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Jae Jun

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Graham assigned a PE of 8.5 for Zero Growth Companies

According to Benjamin Graham’s formula from The Intelligent Investor, he assigned a PE of 8.5 to a company with zero growth. However, if you have used my stock valuation spreadsheet or read the article on how to value stocks using the Benjamin Graham formula, you would have noticed that I assign a PE of 7 for a no growth stock.

With that in mind, I wanted to know how a stock considered by the market to have no growth potential would perform.

If the PE is too low, then there is a high probability that there really is a fault with the business. But if the company is borderline, there is a good chance that the business is sound and healthy but just misunderstood by the market or affected by macro factors outside of the company’s control.

The PE range of No Growth Stocks

What I tried to do was to find that range of borderline no growth PE’s. Keep in mind that lower expectations make the upside return that much more impressive as David Dreman has emphasized heavily in his books.

Through trial and error, I found that a PE range of 7 to 8.5 yielded the best results, but to be certain that I was getting quality companies, I included an additional criteria of ROE greater than 13%.

With the addition of ROE, the results are very impressive.

Low Expectations Stock Screen Results

YTD the screen has returned a price return of 14.3% compared to 1.1% for the S&P500.

In a year where the majority of funds are under-performing, the screen selection is doing extremely well.

Here are the stocks that are being tracked from the beginning of the year.

As you can see from the list, the majority are all very well capitalized and healthy businesses, but the reason why I’m impressed with the results can be visualized from the performance graphs below.

 

Compared to my other stock screener backtest performances, the low expectations screen isn’t as explosive, but the stability and the downside protection this screen provides is very impressive.

Since a screen does not have any intelligence, if you were to monitor these stocks a little closer and sell when you felt it was becoming overvalued, I’m sure the results would be even better.

15 Stocks with Low Expectations but Ready to Break Out

Any of these companies catch your eye? Tell me in the comments below.

Disclosure: None.

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