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10 Graham Picks for 2003
December is filled with family, friends, and, for investors, the dreams of healthy dividends. In what has become a December tradition, I look at Benjamin Graham's strategy for defensive investors using the MSN.com stock screener. Long-time Canadian MoneySaver readers will note that this is the third time I've discussed Graham's conservative technique. Benjamin Graham first outlined his rules for defensive investors in The Intelligent Investor (ISBN 0060155477) which has been in bookstores for more than fifty years. I've breifly summarized Graham's time-tested rules in Figure 1. Usually few stocks meet Graham's stringent rules for earnings growth at a low price and his method often rejects all stocks as unsuitable. Rejection has certainly been the rule in recent times and the situation has not changed much this year despite overall market weakness. Implementing Graham's rules can be tricky but the MSN.com screener does a reasonably good job of approximating them. The problem is that MSN.com's screener doesn't have the wealth of historical data needed to fully implement Graham's rules for defensive investors. For instance, the MSN.com database only contains five years of data on each stock and, as a result, I've trimmed down Graham's rules as shown in Figure 2. Even with these relaxed rules only nine stocks passed all the tests in 2000, five in 2001 and ten this year. To put this in perspective, there are currently over 6,900 stocks in the MSN.com database. The nine picks of 2000 continued to do well with five in the plus column and four losing ground to date. The stock by stock breakdown is shown in Table 1 and the average gain for these stocks was very healthy at 35.86%. Given that the S&P500 fell by 33.85% over the same period, the Graham stocks managed a remarkable outperformance of 69.71% over two years. I should hasten to add, that outperforming the index by almost 70% should in no way be considered typical, or even expected. It turns out that the five picks of 2001 also performed well with an average gain of 28.24%. Table 2 shows that the individual stocks gained between 8.67% and 56.51%. The S&P500, on the other hand, fell 16.05% over the same period, which translates into an outperformance of 44.29% from the 2001 Graham picks. Clearly Graham's defensive approach has done quite well in the bear market. However, it has been my experience that periods of significant outperformance are often followed by periods of severe underperformance. Be warned that buying into a style that has recently done very well is no guarantee that it will continue to do well. Past performance is usually a poor indicator of future performance. The current crop of Graham stocks is shown in Table 3. We all know that stocks can move very rapidly in today's volatile environment and I suggest using the MSN.com screener to be sure that the stocks in Table 3 still fit Graham's criteria. http://moneycentral.msn.com/articles/common/finderpro.asp It is important to note that stock screeners can be deceptive at times because they aren't always up to date. For example, consider a company with steady earnings that suffers from some sudden calamity. Say its main manufacturing facility is demolished by a tornado. In this case, the stock may be labeled by the stock screener as good pick due to its recent quarterly numbers. However, the company's situation has clearly changed for the worse. In this way one often finds stocks that look good on the screener but aren't good for a portfolio. As a result, I often like to see some indication that a company's situation has remained largely unchanged before buying. Looking at recent news stories on the company can often help the investor avoid the stinkers. It is important to try to select stocks that are simply unloved and avoid those heading for the dumpster. Looking at this year's crop of Graham stocks one quickly notices that many homebuilders and related companies fill the list. The dominance of this hot sector is particularly troubling. Granted, interest rates are at historic lows and first-time buyers are flooding the real estate market but many fear that another bubble is growing in real estate. If interest rates climb or the economy continues to weaken then the housing market could go from boom to bust and take this year's Graham stocks down significantly. Furthermore, these stocks are not suitable for all portfolios. Be sure to talk to your advisor before investing. Once again, buyer beware. Figures & Tables
Additional Resources:
First published in the December 2002 edition of the Canadian MoneySaver magazine. |
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| Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More... | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
