Benjamin Graham defined what it means to be a value investor. The classic Grahamian value investing play relies on undervalued assets on the balance sheet, coupled with significant margin of safety. A dyed in the wool value investor patiently waits for Mr. Market to realize the correct value of these assets, and then reprice the stock to reflect this value. While the profits can be significant, the process is dull with long stretches of inaction.
Graham also wrote about an Enterprising Investor who pays more heed to the income statement. Valuation is important, of course, Graham would never suggest anything that is not a good price, but a great deal of attention is paid to the EPS growth of the company and financial strength as measured by low debt and high current ratio. One can almost see the beginnings of the Quality factor in the Graham’s Enterprising Investor screens.
I ran the Graham Enterprising Investor screen for mid cap stocks, defined as with market capitalization between $2 B and $5 B with the following criteria:
- Earnings Stability: Positive earnings in each of the past 5 years
- Moderate Debt: Long-term debt less than 110% of net current assets
- Current Ratio: At least 1.5
- Earnings Growth: Earnings per share is higher than 5 years ago
- Reasonable Valuation: Price-to-Earnings (P/E) ratio is lowest 30% of the sector and Price-to-Book (P/B) ratio is less than 2
- Existing Dividend: The company pays some dividend to denote strength in cash flow and shareholder friendliness
This screen yielded 15 stocks. I will list these stocks in the table below and then highlight any of these stocks that I find interesting to proceed with further due diligence.
Quick Disclosure: We own ATKR in our portfolios currently. We have owned TGNA in the past.
Just because a screen delivered these stocks, it does not mean they are ready to be purchased. Not yet anyway. First, you need to scan through these stocks to determine which ones are a serious candidate for your portfolio. I will have a few pointers below. After this is done, go deep into the short-listed stocks and analyze the company and determine if the stock price is at fair value, over valued or under valued. You should then review the undervalued stocks and determine if you wish to take a position.
Should you buy TGNA today? Check out our fundamental stock analysis of TGNA here
The following stocks are of particular interest.
- TGNA – We have owned the stock before and the price is now below where we sold the stock at. At today’s prices the stock is at around 26% margin of safety. It also pays a nice 3% dividend yield.
- ATKR – We currently own the stock in our Premium portfolio.
- GHC – Graham Holdings is in the same industry as Tegna although its holdings are a little diverse. Its largest segment is Kaplan International (test prep) although it is also well represented in television broadcasting and advertising. The stock maybe as much as 39% below the intrinsic value.
Take a look at the stocks above and perhaps there is something that you find a great value.
