6 value buys

These stocks meet the criteria of Ben Graham, known as the Father of Value Investing.

By TheStockAdvisors Jun 3, 2013 9:26AM

Stock market report (© Corbis)By John Reese, Validea


Known as the Father of Value Investing, Benjamin Graham inspired a number of famous "sons" -- Mario Gabelli, John Neff, John Templeton and, most famously, Warren Buffett are all Graham disciples who went on to their own stock market greatness.


Having lived through both his own family's financial troubles and the 1929 market crash, the strategy Graham laid out in his classic book "The Intelligent Investor" was a conservative, loss-averse approach. He abhorred risk.


True "investment," he wrote, deals with the future "more as a hazard to be guarded against than as a source of profit through prophecy."


In terms of specifics, Graham's Defensive Investor approach limited risk in a number of ways, and my Graham-based model lays out several of those methods.


For example, one key criterion is that a company's current ratio -- that is, the ratio of its current assets to its current liabilities -- is at least two, showing that the company is in good financial shape. The approach also targets financially sound companies by requiring that long-term debt not exceed net current assets.


To find low-risk plays, the Graham method wanted price-to-earnings ratios to be no greater than 15 (and, as another signal of his conservative style, he looked not only at trailing 12-month earnings but also at three-year average earnings to ensure that one-year anomalies didn't skew the price-to-earnings ratio).


For the price-to-book ratio, he used a more unusual standard: He believed that the price-to-earnings ratio multiplied by the price-to-book ratio should be no greater than 22.


Here are six of the current holdings in my Graham-inspired portfolio:


Alliant TechSystems (ATK)

National-Oilwell Varco (NOV)

Bridgepoint Education (BPI)

Chevron (CVX)

Western Digital (WDC)

Apollo Group (APOL)


Since I started tracking my Guru Strategies nearly 10 years ago, the performance of my Graham-based model has been rather remarkable.


Even though the strategy Graham outlined is now more than 60 years old, it just keeps on working. Through May 20, my Graham-based portfolio was up 311.8% since its July 2003 inception. That's a 15.4% annualized return in a period in which the S&P 500 ($INX) has gained just 5.3% per year.


These long-term results are a great demonstration of how successful stock investing doesn't need to be incredibly complex or cutting-edge. You don't need fancy theories or gimmicks; you just need to focus on good companies whose stocks are selling at good values. Do that, and you should produce some strong results of your own.


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