The difference between a company’s actual value (net working capital minus debt) and the value at which its shares sell in the market describes what Benjamin Graham called the “margin of safety.” In a recent article for The Globe and Mail, Validea CEO John Reese offers insights regarding the metric and findings of research concerning its credibility.
The article cites Warren Buffett’s explanation of the margin of safety: “You don’t try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pounds across it.”
Reese identifies three stocks that score well under Validea’s Graham-inspired stock screen:
- Fossil Group (FOSL) is a producer of watches and other fashion accessories with a market cap of $965 million. The stock has seen a more than tripling of earnings-per share, and is currently trading at a below market P/E and near its 52-week low.
- Cato Group (CATO), another fashion retailer, earns a perfect score under the Graham-based model due to its solid liquidity and low leverage. A modest P/E and price-sales ratio add appeal to this stock.
- Sanderson Farms (SAFM) is a producer and marketer of chicken products. The company has solid long-term EPS growth and the stock is trading at attractive valuation levels.