Graham Value Stock Portfolio October Update

In January 2012 I announced a new portfolio, a Benjamin Graham “inspired” value stock portfolio.  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. The portfolio tracks returns for a portfolio of 15 stocks selected based on a variety of valuation metrics.

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

The actual screen factors are below:

  • Liquidity filter: No OTC Stocks
  • Market capitalization > $100 million
  • 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)

Stocks will now be sold when they drop below the 75th percentile ranking based on the ranking system above. Improvements in the screening and testing platform (via Portfolio123) allows a change in the sell/turnover rule from previous updates.   I originally intended to update the portfolio monthly; however, in the spirit of creating a lower turnover, value-driven portfolio it is now updated less frequently.

I began tracking this portfolio real-time on January 13th, 2012. As of October 15th, 2014 it is up over 34%. 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.

Below is a 14+ year backtest results for this screen  using a quarterly rebalance and .50% slippage to help account for bid/ask spreads. Backtests include the 75th percentile sell rule (stocks will only be sold when they drop below the 75th percentile ranking):

(test data courtesy of Portfolio123)


The stocks being sold 10/16/2014 are listed below:

Symbol Name Purchase Date Cost Basis Current Value Percentage Gain/Loss
CHRM Charm Communications 1/15/2014 $9,622.36 $10,658.26 10.77%
HUM Humana 1/15/2014 $9,615.87 $12,447.27 29.45%

The current portfolio is listed below:

Current Positions Symbol Name Purchase Price Purchase Date Unadjusted Percentage Gain/Loss Current Price
Hold BGFV Big 5 Sporting Goods Corp 15.32 4/15/2014 -33.88% 10.13
Hold BWC The Babcock & Wilcox Company 33.85 4/15/2014 -16.51% 28.26
Hold HFC HollyFrontier Corp 45.9 4/15/2013 -8.98% 41.78
NEW ALG Alamo Group 39.72 10/15/2014 0.00% 39.72
Hold CLMS Calamos Asset Management Inc. 12.67 4/15/2014 -6.31% 11.87
Hold CSH Cash America International 47.35 4/15/2014 -9.52% 42.84
Hold CTCM CTC Media, Inc 9.26 4/15/2014 -45.90% 5.01
NEW UFPI Universal Forest Products Inc. 46.06 10/15/2014 0.00% 46.06
Hold JST Jinpan International 7.77 1/15/2014 -2.45% 7.58
Hold SWM Schweitzer-Mauduit Intl Inc 33.61 10/15/2012 11.40% 37.44
Hold WMK Weis Markets Inc. 38.69 1/15/2013 5.17% 40.69
Hold RCKY Rocky Brands 15.37 1/15/2014 -8.59% 14.05
Hold SCVL Shoe Carnival Inc. 24.82 1/15/2014 -23.81% 18.91
Hold DDS Dillard’s Inc. 91.08 4/15/2014 13.35% 103.24
Hold KALU Kaiser Aluminum Corporation 73.01 4/15/2014 1.11% 73.82

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