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While pickings have been slim in value land, I was pleased to see some interesting results Wednesday from my Benjamin Graham inspired "stocks for the defensive investor" screen. While this screen has produced some great ideas over the years, not all have worked. In fact, with a growing history and inventory of past ideas, it is becoming clear that one industry in particular, retail, has generally produced poor results.
Names such as Dillard's (DDS) and Stage Stores (SSI) , while meeting the criteria at various times, have been a huge drag on results. One other, Finish Line (FINL) , produced some solid results in an earlier vintage of the screen, but I've decided to add retailers to utilities on the list of excluded industries. It is an industry in decline in some respects, and what appear to be "cheap" valuations, may actually signify the dreaded "value trap."
Otherwise, the search criteria remain the same.
- 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 firm must have a "current ratio" (current assets divided by current liabilities) of at least 2.0. It must also have less long-term debt than working capital.
- Earnings stability. A business has to 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 latest 10 years.)
- Moderate price-to-earnings 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 ratio must be less than 22.5.
- No utilities or retailers.
There are currently five companies that make the cut, the most I've seen in quite a while, but still not a good sample size. Two of them, Cooper Tire & Rubber (CTB) and Waddell & Reed (WDR) , have made the list several times previously. At some point, you've got to question whether they are truly cheap, or whether current valuations just reflect their true nature.
Corning (GLW) is also back on the list. While it is not a perennial, as CTB and WDR seem to be, we have seen it before. GLW is up more than 50% in the past year, and has been putting up solid earnings for the past several quarters. Currently yielding 2.2%, the company continues to not only raise the dividend, but is also buying back stock; having reduced shares outstanding by 40% in the past five years. Not everyone agrees, but I find the combination of stock buybacks and increasing dividends to be quite powerful. GLW also has an impressive amount of cash and short-term investments on the books -- $5.72 billion or $6 per share at year end -- while total debt stood at $3.9 billion.
As a side note, there were a couple of retailers that would have made the cut, had I not decided to exclude that sector. They shall remain nameless. I will, however, track them in order to see if their exclusion was wise.