Benjamin Graham, often referred to as the “Father of Value Investing,” was an influential economist, professor, and investor who laid the groundwork for modern value investing. Born in 1894, Graham developed his investment philosophy during the tumultuous period of the Great Depression. His experiences during this time shaped his conservative, risk-averse approach to investing, which he detailed in his seminal works “Security Analysis” (1934) and “The Intelligent Investor” (1949).
Graham’s investment criteria focused on finding undervalued companies with strong fundamentals. He advocated for a margin of safety in investments, believing that buying stocks at a significant discount to their intrinsic value would protect investors from downside risk. Graham emphasized thorough analysis of financial statements, looking for companies with strong balance sheets, consistent earnings, and low debt levels.
Validea has adapted Graham’s principles into a quantitative strategy that can be applied systematically to evaluate stocks. Our interpretation of Graham’s approach includes several specific criteria:
- Market Capitalization: Graham focused on larger, more established companies. Validea’s strategy typically looks for companies with a market cap of at least $2 billion, adjusting for inflation since Graham’s time.
- Current Ratio: This measures a company’s ability to pay short-term obligations. Validea’s Graham strategy requires a current ratio of at least 2, indicating strong liquidity.
- Long-Term Debt to Working Capital: Graham preferred companies with low debt. The strategy looks for companies where long-term debt doesn’t exceed net current assets (working capital).
- Earnings Stability: The strategy requires positive earnings for each of the past 10 years, reflecting Graham’s preference for consistent profitability.
- Earnings Growth: The strategy requires that a company’s earnings per share have grown by at least 30% over the last 10 years.
- Price-to-Earnings Ratio: In line with Graham’s value focus, the strategy seeks companies with a P/E ratio of 15 or less.
- Price-to-Earnings times Price-to-Book: This combined metric should be less than 22 reinforcing the focus on undervalued stocks.
Here are the top 10 stocks using Validea’s Benjamin Graham strategy for August of 2024.
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