Graham Value Portfolio

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In January I announced a new portfolio, a Benjamin Graham “inspired” value stock portfolio.  The purpose of the hypothetical portfolio is to track returns for a portfolio of 15 stocks selected based on a variety of valuation metrics.  I originally intended to update the portfolio monthly; however, in the spirit of creating a lower turnover, value-driven portfolio going forward it will be updated less frequently, approximately once per quarter. I have also added an additional criteria to limit turnover in the portfolio (see below).

The Graham portfolio is an attempt to add a value strategy to Scott’s Investments, which is otherwise focused on momentum, trend, income and market timing strategies. There are numerous ways to add market timing or hedging techniques to any stock portfolio, such as shorting the S&P 500 when it trades below a long-term moving average while simultaneously holding a portfolio of long stock positions. However, for the purposes of this portfolio there will be no additional timing or hedging techniques.

The criteria used to select the stocks are listed below.  The tools used to perform the screen and backtests are courtesy of  Stockscreen123 (“SS123”) and Portfolio123 (“P123″).

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)

 

I began tracking this portfolio real-time on January 13th, 2012.  As of this writing, the portfolio is down 5.53% including dividends,compared to a positive return of 5.7% (excluding dividends) for SPY over the same period. A real-world application of this portfolio could also utilize stop losses in order to prevent large drawdowns in single positions. However, for the purposes of tracking the portfolio results all positions are bought and held until rebalancing.

One new twist has been added to help limit portfolio turnover – stocks will only be sold when they drop out of the top 20 in Graham Value screen.  Thus, a stock could theoretically drop to the 20th ranking but remain in the 15 stock portfolio if it is a current holding.

An interesting early trend in live tracking is that of smaller, less liquid equities appearing frequently on the list. This makes for a potentially more volatile, higher beta list of equities.

The top 20 stocks are listed below:

 

Ticker Name Rank MktCap Industry
JST Jinpan International Ltd 97.74 114.63 Electrical Equipment
PAAS Pan American Silver Corp 95.81 2229.94 Metals & Mining
SVT Servotronics Inc. 94.73 19.48 Electrical Equipment
CHRM Charm Communications Inc 94.37 211.99 Media
PLPC Preformed Line Products Company 88.37 298.7 Electrical Equipment
EEI Ecology and Environment Inc. 88.28 53.06 Commercial Services & Supplies
HP Helmerich & Payne Inc. 86.08 4617.6 Energy Equipment & Services
FORTY Formula Systems (1985) Ltd 83.09 196.35 IT Services
CVX Chevron Corp 82.28 210696.1 Oil, Gas & Consumable Fuels
MANT ManTech International Corp 82.17 829.24 IT Services
TESS TESSCO Technologies Inc 81.22 163.57 Communications Equipment
ALG Alamo Group Inc. 80.77 360.87 Machinery
DEER Deer Consumer Products Inc 78.24 90.7 Household Durables
KNM Konami Corp 77.91 2963.7 Software
HUM Humana Inc. 74.7 12156.84 Health Care Providers & Services
HAL Halliburton Co 70.03 26767 Energy Equipment & Services
SWM Schweitzer-Mauduit Intl Inc 68.94 1108.99 Paper & Forest Products
WAG Walgreen Co 68.45 26183.18 Food & Staples Retailing
EGO Eldorado Gold Corp 67.55 7591.76 Metals & Mining
KBR KBR Inc 66.41 3467.93 Construction & Engineering

Current positions are listed below:

Symbol Name Purchase Date Cost Basis Current Value Percentage Gain/Loss
JST Jinpan International Ltd 7/17/2012 $6,662.70 $6,662.70 0.00%
SVT Servotronics, Inc. 1/13/2012 $6,664.68 $6,316.20 -5.23%
PAAS Pan American Silver Corp 7/17/2012 $6,649.50 $6,649.50 0.00%
CHRM Charm Communications Inc 7/17/2012 $6,667.84 $6,667.84 0.00%
MANT Mantech International Corp 2/15/2012 $7,510.88 $4,628.00 -38.38%
HP Helmerich & Payne Inc. 7/17/2012 $6,617.09 $6,617.09 0.00%
EEI Ecology and Environment 1/13/2012 $6,658.20 $4,829.25 -27.47%
ALG Alamo Group, Inc. 3/14/2012 $6,748.11 $7,418.79 9.94%
CVX Chevron Corporation 1/13/2012 $6,577.58 $6,660.66 1.26%
FORTY Formula Systems (1985) Ltd 7/17/2012 $6,655.50 $6,655.50 0.00%
WAG Walgreen Company 4/13/2012 $7,004.48 $6,508.40 -7.08%
PLPC Preformed Line Products Company 3/14/2012 $6,732.66 $5,858.00 -12.99%
HUM Humana Inc. 3/14/2012 $6,722.10 $5,659.50 -15.81%
TESS TESSCO Technologies Inc 7/17/2012 $6,648.64 $6,648.64 0.00%
DEER Deer Consumer Products Inc 7/17/2012 $6,669.30 $6,669.30 0.00%

Finally, for those of you interested in backtested results, below are the results of this screen, re-balanced every three months beginning on 1/2/1999. Please note that the backtests do not include the rule that stocks must fall out of the top 20 before being sold. Also, tests exclude commissions and taxes:

A five year test starting on 7/17/2007 looks like the following:

All tests courtesy of  Stockscreen123

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