With markets around the world trading at all-time highs and inflated valuations, I thought it would be interesting to go hunting for Benjamin Graham-style stocks to see if there are any companies out there that might still qualify as deep-value investments.
For this test, I screened the market using a version of Graham’s Enterprising Investor screen:
- Price-earnings ratio less than 10.
- Current ratio greater than 1.5.
- Long-term debt less than 1.1 times working capital.
- Earnings per share (EPS) streak greater than four.
- Dividend history greater than 0.
- EPS greater than EPS five years ago.
- Price-tangible book value less than 1.2.
- Primary listing in U.S.
There are a few criteria I have been a bit flexible on here, so the stocks below do not 100% conform to the above requirements (mainly on dividends). But aside from that, the stocks do meet all of the "cheap" criteria, such as a low price-earnings ratio and a price-tangible book value less than 1.2, and they all have their primary listing in the U.S. In addition, all the companies profiled below have a strong balance sheet.
Undervalued energy
The first company that ticks all the boxes is Red Trail Energy LLC (REGX, Financial), an owner-operator of a fuel-grade ethanol plant near Richardton, North Dakota. This $56 million market cap stock currently trades at a trailing 12-month price-earnings ratio of 10 and a price-tangible book value of 0.8.
At the end of the last reported period, the company had a net cash balance of $3.2 million and had reported positive earnings for the past five years. Earnings per share hit 20 cents for 2017, up from three cents five years ago. Unfortunately, the stock does meet Graham’s dividend criteria, but on all other metrics, it passes.
Retail troubles
The second company to pass the screen is Big 5 Sporting Goods (BGFV, Financial). Even though Wall Street has this company going nowhere over the next several years, it still passes Graham’s screen due to its cheapness.
Over the next two years (including full-year 2017), Wall Street analysts have the company’s earnings falling by around 15% to 64 cents for 2018. Over the past five years (2016 to 2011), however, earnings per share are up around 20%. Based on this, Big 5 passes Graham’s earnings growth screen. The stock is also cheap, trading at a forward price-earnings ratio of 9.5 and price-tangible book value of 0.6.
A dividend has been paid for each of the last six years, and over this period the payout has doubled. The current ratio is 2.1 (although most of the company’s current assets are inventory as the quick ratio of 0.2 shows). Long-term debt is $46 million, compared to working capital of $173 million as reported at the end of the third quarter.
Uncovered growth?
The final stock is Cemtrex Inc. (CETX, Financial), which has a $30 million market cap. The company looks more like a growth stock than a value stock. Wall Street is expecting its earnings per share to more than triple from 31 cents to $1.14 over the next two years. Despite this, the stock trades at a forward price-earnings ratio of only 3.5 and a price-angible book ratio of 0.9.
The company meets all of Graham’s other criteria as well. While it does have some debt, it looks as if this is easily sustainable. At the end of fiscal 2017, the company had net debt of $5.6 million and a cash balance of $10.4 million.
Working capital at the end of the period was $26.4 million, giving a current ratio of 2.3 (once again a quick ratio of 1.5 shows most of this is tied up in inventory). Once again, this company does not pay a dividend (even though it could), but its earnings per share are up 200% over the past five years.
Disclosure: The author owns no stocks mentioned.
