Get Defensive in 2009

Many value screens are producing qualifying securities more than ever. Back in June, very few stocks would pass the test, but back in June, the S&P 500 was over 1300. With the market off more than 40% (but many companies down by much more), many businesses are meeting a lot of deep value filters.

Reading the latest issue of Grant's Interest Rate Observer, I've come to discover that several businesses now meet Ben Graham's defensive investor criteria given to us in the fourth edition of "The Intelligent Investor." As the market winds down and many investors attempt to forget the past 12 months, the following names should make for great holiday research.

Graham had seven requirements businesses had to meet:

1. Adequate size.

2. Rock-solid balance sheet -- to Graham this meant current assets that exceeded twice all liabilities.

3. Profits for 10 consecutive years.

4. Dividend payments for 20 consecutive years.

5. Earnings growth of 33% during the past decade.

6. A P/E of 15 or less.

7. A P/B of 1.5 or less.

If a business didn't meet either of the last two conditions, Graham would have accepted a combination of the two, or a P/E times P/B of less than 22.5.

As you might guess, Graham posed some rather stiff conditions. Indeed if a business could meet all seven criteria, then it was certainly deserving of being labeled defensive investments. It was my initial thought that no company could pass all seven filters.

Six months ago, that might have been the case, but with many stocks trading at prices not seen since 1997, eight securities actually passed the test. This doesn't seem like a large number, but considering the conditions, it's actually a very high figure and another indication that there is lots of value in this market if one has the stomach and patience for it.

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At the time of publication, Gad had no positions in the stocks mentioned, although positions may change at any time.

Sham Gad is the managing partner of the Gad Partners Fund and the Gad Partners Offshore fund, value-centric investment partnerships based in Athens, Georgia. Gad has written extensively for the Motley Fool and was a securities analyst for UAS Asset Management, a small, value-focused fund in New York City in 2007. Previously, Gad managed assets for the Gad Investment Group. For additional information, please visit www.gadcapital.com.

Gad also runs a value-investing blog inspired by the teachings of Benjamin Graham and Warren Buffett. Additionally, he is currently working on a value investing book to be published by John Wiley & Sons in the fall of 2009. Gad earned his BBA and MBA at the University of Georgia. Send Sham Gad an email. You can reach Gad at [e-mail].