Screen 1: Graham Stock Checklist Screen
Out of the 10 original criteria, I found that the following 4 produced the best results.
- Criteria 1 out of 10: An earnings-to-price yield at least twice the AAA bond rate
- Criteria 2 out of 10: P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years
- Criteria 6 out of 10: Total debt less than book value
- Criteria 7 out of 10: Current ratio great than 2
My thought process of how I came to my conclusions is in more detail in the linked articles.
I then created a test portfolio with the screen results. It’s too early to conclude anything, but so far, the stocks chosen by the screen is considerably outperforming the market.
Screen2: Graham Valuation Screen
I’m excited about this new screen.
You already know that Graham’s method of investing in discounted assets work. But there hasn’t been many discussions proving that the valuation equation actually works.
When tweaked the right way, it certainly does. Here’s the way I interpreted the equation into a screen.
First, the result from the many trials I performed.
Interesting how no stocks would have made the cut in 2001.
Now, how did I create this?
My Thought Process in Creating the Valuation Screen
Narrow Down Companies based on EPS
What I consider to be important when using EPS is to make sure that it is consistent and growing.
You do not want a company with EPS growth of 70%. It will be much too difficult to assess for a screener. Besides, everyone else is screening for huge growth.
The essence of value investing is finding a company at a cheap price. All the companies with huge growth rates are likely overvalued one way or another. What I did was search for, were companies that had temporary depressed EPS growth compared to the mean.
I did this by selecting companies where the 3 year EPS growth was less than the 10 year EPS growth rate. The 5 year and 1o year EPS also had to be positive.
Select EPS Value
Graham used the trailing twelve month (TTM) EPS but I believe I can do better.
There are plenty of sites that offer analyst EPS projections so I used the mean of these EPS estimates. My thought here is that if the current EPS growth rate is depressed but the projected EPS is set to be higher, then surely the passing companies should do better than most.
Specifying the Intrinsic Value Range
I used two versions of the Graham formula
[EPS x (7.5 + 1.5G) x 4.4]/Y and [EPS x (8.5 + 2G) x 4.4]/Y
The formula using 7.5 is considered to be the intrinsic value at the lower end of the range and the 8.5 equation as the upper range value.
Then, simply select all the companies trading with a 33% margin of safety to the lower intrinsic value.
Running the screen, the following list of stocks show up.
While not all the results are accurate, it’s a good start. Definitely lots of potential here.
Don’t forget to view the rest of the value screens.