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Further
Reading ...
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The First Pagoda - Dr Maxine Thompson
The First Pagoda By Dr. Maxine Thompson http://www.maxineshow.com http://www.maxinethompson.com (Dedicated to the Memory of My Father, Mervin Vann) "Impossibilities are merely things of which we have not learned, or which we do not wish to...
Selling With Your Own Web Site - Stephen Bucaro
Many people have their own product, a book, a CD, a craft, or other product that they would like to sell with their own Web site, but they can't find simple instructions on how to get started. In this article, I'm going to explain how to sell your...
How to Sell Your Products Without Competition - Rena Klingenberg
Selling your products at shows can be difficult when you have a lot of competition. Although some show organizers are careful to have a good mix of vendors, it's not uncommon for other shows to have 20% or more of the booths filled with vendors in...
Fear Factor - Olabisi DJ
Is it possible for an individual to pass a course of instruction with high marks and remain ineffective? Is it possible that this person never actually learned anything, but merely gathered enough information and remember it well enough to...
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Finding Undervalued Stocks 2 - Revisiting Graham's Rules
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Written By:
John B. Keown
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In a previous article, we discussed Ben Graham's Net Current Asset Value
(NCAV) strategy and how it works. Here we will revisit Graham's rules, which
were fairly severe in their original form in that they required the price of the
stocks under consideration to be trading at less than two-thirds of their NCAV
or Graham's Number. These he considered to be "Bargain Issues", and to
quote him: "Our purchases were made typically at two-thirds or less of such
stripped-down asset value. In most years we carried a wide diversification here--
at least 100 different issues."
Such a wide diversification may seem excessive for most investors, but
with such low-priced stock there were evidently going to be a few bankruptcy
candidates. Graham considered this strategy to be suitable for what he called
"defensive" investors. He did acknowledge, however, that there were some
"enterprising" investors who could afford to be more aggressive from the point
of view of risk. To this end, he suggested a series of less onerous criteria
for selecting stocks which is outlined below.
First, list all stocks with Price/Earnings ratios below 9. Note: Graham was
writing in 1970 when P/E's as a whole were not as elevated by technology
stocks as they are today. Readers who are less risk-averse or who just want
to consider a wider range of stocks may wish to vary the P/E in order to see
what comes up -- perhaps up to 80 percent of the average P/E of the S&P 500
would be a good start. Currently the operating average is around 18 and 85
percent of that figure is just over 15. Graham did not state if he was using a
Trailing or Forward P/E ratio, but most likely he was using Trailing P/Es. I
personally prefer to use Forward P/E ratios, especially if they are significantly
lower than the Trailing P/E as this implies expected earnings growth and
therefore possible increase in the stock price.
Once we have a list of stocks meeting the P/E criterion, we consider the financial
condition of each stock, referring to the most recent balance sheet:
continued below ...
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continued ...
/>Initially, Current Assets must be at least 1.5 times Current Liabilities. This can
also be gleaned via a stock screener by displaying stocks with "Current Ratio"
>= 1.5. Total Debt must not be greater than 110% of Net Current Assets (i.e.
the sum of Cash & Cash Equivalents, Inventory, Accounts Receivable).
Looking further back, we need to find evidence of Earnings Stability, with no
deficit in the last five years, i.e. no evidence of an annual loss. Additionally,
evidence of earnings growth over a five-year period is a must. This can simply
be the consideration, for example, that 2004 earnings were greater than 2000
earnings.
There should be some current dividend payout. Finally, the current price of the
stock should be less than 120% of the NCAV per share or Graham's Number.
Where to find this number? From the balance sheet, subtract Total Liabilities
from Current Assets, and divide the result by the number of shares outstanding.
Assuming you have a positive number that is greater than zero, the stock's price
should not be greater than 120% of this number.
At grahaminvestor.com, we list stocks that are trading within 120% of the NCAV
per share. Since this was an important measure for Graham, you can start there
and work your way backwards through the other criteria.
Graham did not set any lower limit on market capitalization. "Small companies
may afford enough safety if bought carefully and on a group basis." He meant
that a well diversified portfolio with a fair number of such companies stock would
protect the enterprising investor from the bankruptcy of one or two companies.
(c) 2005 The Graham Investor
You may use this article, as-is, provided this copyright notice is kept intact.
About the Author
John B. Keown is an IT specialist, website builder and private investor who enjoys all things stock-related and in particular seeking out undervalued stocks.
He can be contacted via
http://www.grahaminvestor.com
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| _Additional Resources ... |
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Do You Play Hit and Miss With Your Marketing? - Denise Hall
Too many online marketers use a "hit and miss" marketing approach. By that I mean placing some ads here and there in the hopes of selling something. And it's the worst possible way to do business. Why? Because you probably *won't* do much, if...
When Tactics Are Not Enough - Robert A Kelly
Please feel free to publish this article and resource box in your ezine, newsletter, offline publication or website. A copy would be appreciated at bobkelly@TNI.net. Word count is 975 including guidelines and resource box. Robert A. Kelly ©...
The Home Biz Pop Quiz - BB Lee
The Home Biz Pop Quiz by BB Lee (C)2004 506 words Are you serious about starting or managing your own home based business? Consider this: most successful business owners exhibit very similar traits which helped pave the way to their success. ...
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