In Search of the Next Berkshire Hathaway >> The next obvious question is: What companies might Graham actually like in the current market? While markets have changed dramatically since Graham's death in 1976, the investment principles he espoused still have merit. In selecting stocks for the "defensive investor," Graham laid out the following criteria, which I've modified slightly given the fact that the last edition of The Intelligent Investor was published in 1973.
- 1. Adequate size -- Graham excluded smaller companies. I've set the minimum market cap at $1 billion. 2. Strong financial condition -- Minimum current ratio of 2; long-term debt must be less than working capital. 3. Earnings stability -- Graham required positive earnings for at least 10 consecutive years. I am using seven years. 4. Dividends -- Graham required "uninterrupted" dividends for at least 20 years. I am using seven years here as well. 5. Earnings Growth -- Graham looked for companies that increased earnings per share by at least 33% during the past 10 years. I am using a minimum compounded annual growth rate of 5% over seven years. 6. Moderate price-to-earnings ratio -- Average P/E ratios should be less than 15 during the past three years 7. Moderate ratio of price to assets -- Graham sought companies with price-to-book ratios of less than 1.5, but would accept a higher P/E ratio, if the price-to-book ratio was lower. This end result was that P/E times the price-to-book ratio should be less than 25.5. 8. Other considerations -- U.S. companies only. I excluded foreign companies and American depositary receipts (ADRs) from the results.
AVX also has an additional $225 million, or $1.32 per share, in long-term marketable securities, and there's no debt. Given AVX's extremely high current ratio, which is just under 9, the company can easily afford to pay the current 7.5 cent quarterly dividend, which equates to a 2.75% yield. Rounding out the list are defense name Curtiss-Wright ( CW), pawn shop company Cash America International ( CSH), workplace uniform company UniFirst ( UNH), and tobacco name Universal Corp. ( UVV). It's a rather eclectic mix of names, but I would not expect anything less. Finally, I can't help but wonder what Graham would make of the hoopla surrounding the Facebook IPO, and subsequent debacle that's still unfolding. I'm sure he would be smiling, and shaking his head. -- Written by Jonathan Heller, president of KEJ Financial Advisors and a contributor to TheStreet and Real Money. As of publication, he had no positions in the stocks mentioned.