Graham Value Stock Portfolio Updates

Last month I announced a new portfolio, a Benjamin Graham inspired value stock portfolio.    I will not be re-stating the portfolio’s premise each month, but since this is the first update on the portfolio it is worth revisiting the background and screening rules.

Benjamin Graham is known as one of the greatest value investors in American history. He wrote such classics as Security Analysis and The Intelligent Investor: The Definitive Book on Value Investing, which, while both written in the first part of the 20th century, still remain relevant today.

The screen was created by the founders of Stockscreen123 (“SS123”). The full description from Portfolio123, their affiliated site, 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)

The historical results for the 3, 5, and 10 year period are below and updated through February 15th, 2012. Results exclude commission, taxes, and slippage. The portfolio was rebalanced every 4 weeks in the backtest:

I began tracking this portfolio real-time on January 13th, 2012. I manage a hypothetical portfolio of 15 stocks using the criteria listed above.  The portfolio is up 5.94% (includes dividends) for the first month of its existence but keep in mind that equities in general have done quite well in 2012. SPY (SPDR S&P 500 ETF) was up 5.45% over the same time period.

This month there is turnover in 5 of the 15 positions.  I choose to update these holdings monthly, however, a quarterly or longer timeframe could be used as the rebalance point for those looking to lessen turnover.

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The current positions are listed below, along with the 5 positions being sold from last month and their hypothetical gain/loss percentage. New positions are italicized:

Ticker Name Rank MktCap Industry
AVX AVX Corporation 95.88 2267.45 Electronic Instr. & Controls
SVT Servotronics, Inc. 93.4 22.22 Electronic Instr. & Controls
CVX Chevron Corporation 93.13 209105.91 Oil & Gas – Integrated
JCS Communications Systems, Inc. 92.91 128.68 Communications Equipment
NHC National HealthCare Corporation 92.5 623.41 Healthcare Facilities
EEI Ecology and Environment 92.34 70.78 Business Services
RSH RadioShack Corporation 90.6 732.81 Retail (Technology)
SCL Stepan Company 89.51 863.46 Chemicals – Plastics & Rubber
KYO Kyocera Corporation (ADR) 89.18 16795.63 Electronic Instr. & Controls
DO Diamond Offshore Drilling, Inc. 88.71 8662.79 Oil Well Services & Equipment
SGC Superior Uniform Group, Inc. 87.42 73.78 Apparel/Accessories
GES Guess?, Inc. 87.38 3236.98 Retail (Apparel)
MANT Mantech International Corp 87.33 1304.36 Computer Services
SEB Seaboard Corporation 86.71 2394.29 Food Processing
FRD Friedman Industries 86.37 69.01 Iron & Steel
Sell Name Gain / Loss
TESS TESSCO Technologies, Inc. 12.38%
GLW Corning Incorporated -1.36%
BG Bunge Limited 12.76%
WSTG Wayside Technology Group, Inc. 8.77%
LXK Lexmark International, Inc. 8.96%

No current positions in stocks mentioned