Graham Value Stock Portfolio January 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 are now 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 January 16th, 2015 it is up over 36%. 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, assume the next day’s opening price as the execution price, 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)

GRAHAM2

GRAHAM1

The stocks being sold 1/16/2015 are listed below:

 

Symbol Name Purchase Price Purchase Date Cost Basis Closing Value Unadjusted  Gain/Loss
UFPI Universal Forest Products Inc. 46.06 10/15/2014 $13,910.12 $15,417.10 10.83%
SWM Schweitzer-Mauduit Intl Inc 33.61 10/15/2012 $7,158.93 $8,530.65 19.16%
WMK Weis Markets Inc. 38.69 1/15/2013 $6,886.82 $8,567.14 24.40%

The current portfolio is listed below:

Symbol Name Purchase Price Purchase Date Unadjusted Gain/Loss
BGFV Big 5 Sporting Goods Corp 15.32 4/15/2014 -17.69%
BWC The Babcock & Wilcox Company 33.85 4/15/2014 -19.79%
HFC HollyFrontier Corp 45.9 4/15/2013 -32.81%
ALG Alamo Group 39.72 10/15/2014 18.03%
CLMS Calamos Asset Management Inc. 12.67 4/15/2014 1.97%
CSH Cash America International 47.35 4/15/2014 -54.89%
CTCM CTC Media, Inc 9.26 4/15/2014 -48.70%
AVT Avnet 41.69 1/16/2015 0.00%
JST Jinpan International 7.77 1/15/2014 -34.11%
FF FutureFuel 11.79 1/16/2015 0.00%
GPRE Green Plains 21.39 1/16/2015 0.00%
RCKY Rocky Brands 15.37 1/15/2014 -12.62%
SCVL Shoe Carnival Inc. 24.82 1/15/2014 -3.71%
DDS Dillard’s Inc. 91.08 4/15/2014 27.58%
KALU Kaiser Aluminum Corporation 73.01 4/15/2014 -3.63%

3 thoughts on “Graham Value Stock Portfolio January Update”

  1. The Graham portfolio looks very promising.
    In your description of it you state,”  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.”
    I assume that means in the months to come , stop-losses will not be used.
    However, I note that a few times the maximum drawdown of the Graham portfolio exceeded the maximum drawdown of the S&P benchmark.
    Because of those large drawdowns, and because we are very late in this bull market, if you have the time, I’d recommend a second back testing including stop-losses.

  2. How many investors would sit through a 55% draw down and believe everything will be fine? The elephant in the room with value strategies is maximum draw down. If you have a long investing time horizon and you are willing to sit through a huge draw down maybe a value strategy is one type of strategy you should consider in your portfolio of strategies. I could not stomach a 55% loss and would not allocate a penny to a strategy that could be expected to experience such a severe draw down.

Comments are closed.