Admittedly, the rest of the names that currently meet my modified Benjamin Graham “Stocks for the Defensive Investor” criteria are not as big or as well-known as the one I mentioned in my last column, Intel (INTC) .
However, the number of current qualifiers (10) makes this the largest list I’ve seen since the outset of the pandemic.
As a reminder, here are the criteria I use, along with the modifications I made to Graham’s original criteria.
- Adequate size. A company must have at least $500 million in sales on a trailing 12-month basis. (Graham used a $100 million minimum and at least $50 million in total assets.)
- Strong financial condition. A company must have a current ratio (current assets divided by current liabilities) of at least 2.0. It also must have less long-term debt than working capital.
- Earnings stability. A business must have had positive earnings for the past seven years. (Graham used a 10-year minimum.)
- Dividend record. The company must have paid a dividend for the past seven years. (Graham required 20 years.)
- Earnings growth. Earnings must have expanded by at least 3% compounded annually over the past seven years. (Graham mandated a one-third gain in earnings per share over the latest 10 years.)
- Moderate price-to-earnings (P/E) ratio. A stock must have had a 15 or lower average P/E over the past three years.
- Moderate ratio of price to assets. The price-to-earnings ratio times the price-to-book value ratio must be less than 22.5.
- No utilities or retailers
Recreational Vehicle manufacturer Winnebago (WGO) is perhaps the next-most well-known name after Intel that makes the cut. I wrote about WGO in March, with some skepticism due to current economic realities, including fuel prices. The shares are down 29% year-to-date, and the forward price-earnings ratio of 5 demonstrates the caution markets have on this one. I wish Ben Graham was still alive, so I could ask him his take on whether he believed WGO is actually investable now, or not.
Johnson Outdoors (JOUT) , which I wrote about last week, has the distinction of qualifying as both a “Graham Defensive” name, and a “triple-net” (trading at between 2 and 3 times net current asset value or NCAV). The shares fell 15% on Monday after the company announced worse-than-expected fiscal second-quarter earnings. Down 32% year-to-date, JOUT currently trades at just under 9x 2023 estimates (with just one analyst following), and just 2.19x NCAV.
Other current qualifiers include several “repeat offenders”: Reliance Steel & Aluminum (RS) , Commercial Metals (CMC) , Encore Wire (WIRE) , Preformed Line Products (PLPC) , Superior Group of Companies (SGC) , and Mueller Industries (MLI) . When you see retreads like these, you need to question whether they are potential bargains, or just trade at these levels by nature.
Rounding out the list is tiny, low-margin consumer products distributor AMCON Distributing Co. (DIT) , which generated $1.67 billion in 2021 revenue, and earned $15.5 million, for a tiny 0.9% net profit margin.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider DIT to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
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