- 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.
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.