Validea’s Ben Graham strategy is based on the value investing approach pioneered by Benjamin Graham, often called the “Father of Value Investing”. This strategy aims to identify undervalued stocks by focusing on companies with strong financial positions and consistent earnings. The approach uses strict criteria to select stocks, emphasizing safety and value over growth potential.
Key Criteria of the Graham-based Model:
- Sector and Size:
- Excludes technology stocks, which Graham considered too speculative
- Requires minimum trailing 12-month sales of $340 million (adjusted for inflation from Graham’s original $50 million threshold)
- Financial Strength:
- Current ratio (current assets / current liabilities) must be at least 2.0
- Long-term debt should not exceed net current assets (current assets – current liabilities)
- For industrial companies, total debt-to-equity ratio must not exceed 100%
- For utilities, long-term debt-to-equity ratio can be up to 230%
- Earnings Stability and Growth:
- Positive earnings for each of the past 5 years
- 30% cumulative earnings growth over the past 10 years (using 3-year averages)
- Valuation:
- Price-to-earnings (P/E) ratio, based on 3-year average earnings, must be 15 or less
- Price-to-book (P/B) ratio multiplied by P/E ratio should not exceed 22
This strategy aims to identify financially stable, undervalued companies with consistent performance.
Here are the top 10 stocks using Validea’s Benjamin Graham strategy for October of 2024.
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