New Benjamin Graham Inspired Value Portfolio

I am expanding the number of portfolios tracked on the site and portfolio tracking/testing will be one of my top priorities on the new site. My goal is to have a portfolio updated on the site every 5 days, which means about 8 portfolios per month (3 are upated on the first of the month). The portfolios all have a simple, big picture focus in which a relatively few number of factors are combined to create a simple strategy. A majority of the portfolios were  tracked throughout 2011 on Scott’s Investments; I am looking forward to monitoring both old and new portfolios’ performance real-time!

I previously tracked a Small Cap Value Earnings Surprise and Low PEG High Momentum screen. Both screens were created using Stockscreen123 and performed relatively well during the period they were tracked. However, I felt like the screen inputs were influenced by my discretion with the factors randomly chosen. They will be replaced by a Stockscreen123 “Graham” screen. I will track the screen as a hypothetical portfolio rebalanced once per month around the 15th of the month.

The screen was created by the creators of Stockscreen123 (“SS123”). The full description from Portfolio123 is below:

This model is one of our all-star series. It draws inspiration from the work of a well-known investor: in this case, Ben Graham. These screens cannot precisely mimic what the all-star would actually do. Many depend heavily on qualitative considerations that do not lend themselves to screening or ranking, and even where models are quantitative, most offer only limited public disclosure of details. Our model is designed to stand on its own, to have validity even if it were inspired by John Doe. The connection with the all-star is philosophical. The core of our model is consistent with one or more vital aspects of the all-star’s philosophy. The hallmarks of our Graham all-star model are: value and company fundamental strength with an emphasis on survivability and stability.

The actual screen factors are below:

  •  Liquidity filter: No OTC Stocks
  • Eliminate companies classified in the Miscellaneous Financial Services Industry, most of which are investment companies and funds and not the kind of stocks this all-star tended to seek
  • Current ratio must be at least 1.5
  • Long-term debt must be no higher than 10% above working capital
  • EPS must be above breakeven in each of the last four quarters and in each of the last five annual periods
  • Trailing 12 month EPS most be above EPS in the latest annual period
  • EPS in the latest annual period must be above EPS in the prior year and five years ago
  • The company must have paid common dividends in the last 12 months

The ranking system used as a basis for selecting the top 15 based among those stocks that pass the Graham screen are below:

  • Valuation – 60% of total
  • Trailing 12 month P/E (15% of this category)
  • Price-to-Book (15% of this category)
  • Price-to-Tangible Book Value (35% of this category)
  • Operating P/E, defined as Market Capitalization divided by Business Income, which is Sales minus Cost of Goods sold minus Selling, General & Administrative Expense and omits unusual items (35% of this category)
  • Earnings – 40% of total
  • 5-year EPS Growth Rate (50% of this category)
  • EPS Stability, defined as the standard deviation of EPS over the past 16 quarters, lower being better (50% of this category)

How has this portfolio/screen performed historically? Below are the 3, 5, and 10 year returns. Data excludes commission, taxes, and slippage:

 

 

 

The current holdings, which were hypothetically purchased on January 13th using the closing day’s prices, are listed below:

Ticker Name Rank
AVX AVX Corporation 95.15
SVT Servotronics, Inc. 92.75
TESS TESSCO Technologies, Inc. 91.79
JCS Communications Systems, Inc. 91.61
GLW Corning Incorporated 91.57
NHC National HealthCare Corporation 91.54
EEI Ecology and Environment 91.12
GES Guess?, Inc. 90.25
CVX Chevron Corporation 89.8
KYO Kyocera Corporation (ADR) 89.7
BG Bunge Limited 89.6
WSTG Wayside Technology Group, Inc. 86.94
RSH RadioShack Corporation 86.46
SEB Seaboard Corporation 86.08
LXK Lexmark International, Inc. 85.61

At the same time I update this portfolio I will also update Equity vs Fixed Income model signal. This is less of a portfolio and more of a long-term signal by SS123 on whether equities or bonds are in favor. According to SS123:

This model is based on market timing and chooses one core equity ETF, the S&P 500 SPDR (SPY) for when conditions are deemed bullish, and a core fixed-income ETF, the iShares Barclay 20-year Treasury ETF (TLT), for when conditions are deemed bearish.

It assumes conditions are favorable for equity investing if EPS estimates are rising and if valuations are reasonable.

  1. The estimates test is whether the 5-week moving average of the aggregate of the consensus current-year estimates for S&P 500 companies is above the 21-week moving average.

  2. The valuation test is based upon risk premium, specifically, whether the S&P 500 risk premium (earnings yield minus 10-year treasury yield) is above 1%

In other words, at the same time the Graham portfolio is updated I will provide an update on this model. The model will either choose SPY or TLT based on current market conditions. I will not track this is as a portfolio but it could serve as a potential hedging signal – when bonds are in favor the Graham portfolio could be hedged by a position in long-term bonds which tend to be negatively correlated with equities.

As of January 13th the Equities vs Fixed Income model signaled a position in TLT.

More on this topic (What's this?)
Two High-Quality Companies
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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

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