Students of Ben Graham have Limited Trading Options in this Market

Wesley Gray |

Forbes recently outlined one of Ben Graham’s basic value investment strategies and analyzes how it has performed from 1949 through 2012. You can see an excerpt below:

Even with all of the fiscal cliff and European debt drama in 2012, the Graham-based portfolio has had a particularly good year. While the S&P 500 has notched a solid 13.7% gain (all performance figures through Dec. 17), the Graham portfolio is up more than twice that, gaining 28.5%.

It’s been a few years since this study was performed, and we’ve been in a raging bull market since. We were curious to see how the deep value strategy performed, and which stocks fit the screen.

We deploy the following value screens posed by Graham:

  1. Current Ratio > 2.0
  2. EPS growth over last 5 years > 30%
  3. No negative EPS over last 5 years
  4. P/E < 15
  5. P/Average EPS  last 3 years < 15
  6.  max(P/E, P/Average EPS) * P/B  < 22
  7. Market Cap cut is 10th percentile( around 330M as of 2015/03)

The results below are gross of management fee and transaction costs for illustrative purposes only. These are simulated performance results and do not reflect the returns an investor would actually achieve. All returns are total returns and include the reinvestment of distributions (e.g., dividends).

  • SP500 = SP500 Total Return Index
  • Graham_ew = Ben Graham value strategy, equal-weighted
  • Graham_vw = Ben Graham value strategy, value-weighted
  • LTR = Merrill Lynch 7-10 year Government Bond Index (prior to 6/1982, Amit Goyal Data)

 Summary Value Investing Performance 2012/01 to 2014/12

Summary_Value_Investing_6_5.jpg

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Graham_ew_6_5.jpg

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

2012 and 2013 were great; 2014 was painful. Overall, since the value strategy underperformed by over 2% and the strategy is “busted,” value-investing no longer works, and Graham’s ideas are outdated. This general pattern of returns is similar to live performance on many value strategies over this time period.

What Names Pass the Value Investing Screen Now? (as of 4/27/2015)

There was only one name that fits the criteria outlined above:

Hanger, Inc (HGR) :

  1. Current Ratio 3.94
  2. EPS growth over 5 years: 59%
  3. No negative EPS over last 5 years
  4. P/E: 14.38
  5. P/3 years average EPS: 13.24
  6. PB adjust ratio: 20.71
  7. Market Cap: $846MM

Note, this is NOT a stock recommendation. We are simply highlighting the output of the screen proposed by the Ben Graham system in real-time. What do you think?

 

For more market anaylsis from Wesley R. Gray, check out his blog at Alpha Architects here.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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