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Picking Stocks for Benjamin Graham

Jonathan Heller

NEW YORK (TheStreet) -- In early December, I revisited one of my early columns for TheStreet that tried to identify companies that value-investing legend Ben Graham might be interested in if he were alive today.
That column reviewed the performance of the names revealed in that earlier stock screen.
Today we'll look at the current crop of stocks meeting the criteria for Graham's "defensive investor" screen.

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Although much has changed about the markets, trading, and the availability of information to investors since Graham passed away in 1976, his methods still resonate.
Graham had several investment criteria that he utilized to find compelling investment candidates, and this one in particular focuses on identifying stocks for the "defensive investor."
Graham discussed this method in his great work The Intelligent Investor. Because the last edition of this book was published was in 1973, I make the following slight modifications to Graham's original criteria:

  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 sought a minimum increase of 33% in earnings per share in the past 10 years; I am using a minimum compounded annual growth rate in earnings of 5% over seven years.
  6. Moderate Price-to-Earnings Ratio: Average P/E should be less than 15 over the past three years.
  7. Moderate Price-to-Assets Ratio: Graham sought companies with price-to-book ratios of less than 1.5, but he would accept a higher P/E ratio, if the price-to-book was lower. This end result was that P/E times price-to-book ratio should be less than 25.5.
  8. Other: U.S. companies only; I excluded foreign companies and American Depository Receipts from the results.

Although my previous search revealed eight companies, this time it yields just two. Cash America CSH , which operates more than 1,000 pawn shops, is a holdover from the last search.

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The other name is none other than Intel INTC , which has been popping up more frequently on value-related stock screens recently.
It's certainly not difficult to understand why. The stock currently trades with a trailing price-to-earnings ratio of 10, and the P/E is the same based on 2014 consensus earnings estimates.
The stock currently yields 4.3%, and Intel has increased its dividend for 10 consecutive years. Despite its rather low P/E, the company still boasts net profit margins in excess of 20%.
The balance sheet is solid with more than $18 billion in cash and short-term investments, and another $4.4 billion in long-term investments to go along with about $13.5 billion in debt.
Intel is no longer a darling of the growth crowd. Revenue actually fell slightly during 2012, and it remains to be seen where future growth will come from.
There's sometimes a fine line between growth and value, and it is somewhat ironic that Intel now finds itself showing up on the screens of value investors.
Sometimes when the growth crowd gives up on name, it gets punished beyond what is deserved. That's when the value crowd steps in. That's what happened with eBay EBAY a few years ago, a name I thought I'd never own until it became too cheap to ignore. We'll see whether the same is true with Intel. It's definitely on this value investor's radar screen.

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In terms of Graham's Defensive screen, it's very slim pickings. That's par for the course these days in value land.
At the time of publication, Heller had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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