Here's what Ben Graham might pick if he were alive
By John Dorfman
Published: Tuesday, Aug. 13, 2013, 12:01 a.m.
Darken the room. Get out the Ouija board. It's time, once again, to channel the ghost of Benjamin Graham.
Graham (1894-1976) is considered the father of value investing. His methods and teachings influence me and many other money managers of the value school. He was a hedge fund manager, a professor at Columbia University and the mentor to today's most famous investor, Warren Buffett.
When I try to guess what the master would pick, I start with a few criteria:
• Stock price less than 12 times earnings.
• Stock price less than stated book value (corporate net worth per share) and less than 1.5 times tangible book value.
• Debt less than 50 percent of stockholders' equity.
This is the 11th column I've written trying to guess what Graham would do in today's markets. The first 10 appeared in August 2001-06, and August 2009-12.
Of the previous 10 columns, seven were profitable and eight beat the Standard & Poor's 500 Index. The average 12-month return for my Graham selections has been 22.8 percent, compared to 10.5 percent for the S&P 500.
Please note that the performance of my column recommendations is hypothetical and doesn't take into account trading costs or taxes. Past performance doesn't predict results. And the results of my column's recommendations should never be confused with those for actual portfolios I manage for clients.
Last year was good for my Graham selections. All five I picked beat the S&P 500, and all five were up 30 percent or more. Thanks to a 108 percent return in Tyson Foods Inc. (TSN), the average return was a lofty 52 percent. That gave my Graham portfolio a victory over the 22 percent return for the S&P 500.
The worst performer from last year was Corning Inc. (GLW), up 31 percent. Allstate Corp. (ALL) was up 35 percent, First Niagara Financial Group Inc. (FNFG) 36 percent and Kelly Services Inc. (KELYA) 50 percent. All figures include reinvested dividends.
I don't expect this year's picks to do as well as last year's. But if they're anywhere close, I'll be happy.
So, what might Graham pick, were he alive today?
One stock I think he would like is MetLife Inc. (MET), the big life insurer. It sells for nine times earnings and 1.1 times tangible book value.
Rising interest rates, which seem probable the next couple of years, would be a mixed blessing for MetLife. It would enable the company to invest premium income at higher rates until the time comes to pay claims. But it would hurt the value of bonds already in Met's portfolio.
Ingram Micro Inc. (IM), with headquarters in Santa Ana, Calif., is a distributor of computers, software, and related products. Like most distributors, it operates on a thin profit margin, about 1 percent recently in Ingram Micro's case.
That sounds bad, but if your revenue is $43 billion a year (analysts' projection for Ingram this year), that allows for a profit in the neighborhood of $400 million. The company has been profitable in nine of the past ten years.
On the small end of the spectrum, I think Graham might fancy Tropicana Entertainment Inc. (TPCA), a chain of casinos based in Las Vegas, Nev. It owns eight casinos in five states and one on the Caribbean island of Aruba.
The company was put together by financier Carl Icahn after a bankruptcy in 2008-10. It had several predecessor companies, including Aztar Corp. Tropicana Entertainment turned profitable in 2012 and is barely followed by Wall Street.
Even smaller is Northwest Pipe Co. of Vancouver, Wash. The company, which makes steel pipe, was founded in 1966 and went public in 1995. It has turned a profit in eight of the past 10 years.
Graham often favored companies in prosaic industries. I think he would have liked the price/book ratio of 0.97 and the price/tangible book ratio of 1.05.
My final selection is the one I'm least sure of, and I wish I could ask Graham about it. First Solar Inc. (FSLR) of Tempe, Ariz., a maker of solar panels, meets all the statistical criteria I described above.
It has a spotty earnings history. Earnings peaked at well above $7 a share in 2009-10, then turned negative in 2011-12. This year, analysts look for $3.78 a share.
The biggest headache for First Solar is abundant competition from Chinese companies. But with the stock trading below tangible book value, I think the risks are priced in.
John Dorfman is chairman of Thunderstorm Capital LLC in Boston. He can be reached at email@example.com.
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