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Four Defensive Plays for Intelligent Investors

Jonathan Heller looks at names he screened using a modification of Benjamin Graham's defensive investor approach.

TheStreet’s Jonathan Heller says it’s “been a while” since he wrote about the stock screen he uses based on Benjamin Graham's "Stocks for the Defensive Investor," a methodology laid out in Graham's 1949 masterpiece "The Intelligent Investor."

The reason he hasn’t written about it is simple - the screen for many months was coming up empty, with no qualifiers. “The criteria I've used for years have been modified from Graham's, but the principles behind the search are the same,” Heller said in Real Money.

They are: 

  • Adequate size. A company must have at least $500 million in sales on a trailing 12-month basis. (Graham used a $100 million minimum and at least $50 million in total assets.)
  • Strong financial condition. A company must have a current ratio (current assets divided by current liabilities) of at least 2.0. It also must have less long-term debt than working capital.
  • Earnings stability. A business must have had positive earnings for the past seven years. (Graham used a 10-year minimum.)
  • Dividend record. The company must have paid a dividend for the past seven years. (Graham required 20 years.)
  • Earnings growth. Earnings must have expanded by at least 3% compounded annually over the past seven years. (Graham mandated a one-third gain in earnings per share over the last 10 years.)
  • Moderate price-to-earnings (P/E) ratio. A stock must have had a 15 or lower average P/E over the past three years.
  • Moderate ratio of price to assets. The price-to-earnings ratio times the price-to-book value ratio must be less than 22.5.
  • No utilities or retailersCMC. “Commercial Metals, which manufactures steel and metal products, trades at 9x next year's consensus estimates, 11x 2023 consensus estimates and yields 1.74%,” Heller said. “Its shares are up 57% year to date.”

The last time Heller wrote about the Graham screen in February, there were just three qualifiers: Commercial Metals  (CMC) - Get Commercial Metals Company Report (up 39% since then), Methode Electronics   (MEI) - Get Methode Electronics, Inc. Report (up 11%) and Standard Motor Products SMP  (up 19%). Now two of them, CMC and MEI, are back on the list, as repeat offenders.

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“Commercial Metals, which manufactures steel and metal products, trades at 9x next year's consensus estimates, 11x 2023 consensus estimates and yields 1.74%,” Heller said. “Its shares are up 57% year to date.”

Methode Electronics, which occasionally has appeared in other value-related searches Heller uses, trades at 12.5x 2022 consensus estimates (its fiscal year ends in April), 11x 2023 estimates and yields 1.3%. “Its shares are up 10% year to date,” Heller noted.

Heller also points to a newcomer - Miller Industries  (MLR) - Get Miller Industries, Inc. Report. “Miller makes and sells towing equipment, trades at about 14.5x trailing 12-month earnings and yields 1.99%,” Heller said. “Miller Industries currently garners no analyst coverage, so there are no earnings estimates available. Its shares are down 5% year to date and currently yield 1.99%.”

One more Graham special is Winnebago Industries  (WGO) - Get Winnebago Industries, Inc. Report, which trades at 7x 2022 and 2023 consensus estimates.

“Winnebago shares are up 13% year to date and yield 1.06%,” Heller said. “It’s been quite a ride for WGO this year; shares topped out in the $87 range back in March, fell into the low $60s in June, flirted with $80 just weeks ago, and closed Friday at $67.69.”

“The recent pullback came as Keybanc downgraded WGO shares to "sector weight" from "overweight,” Heller added.

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