Periodically, Standard & Poor's provides a list of stocks under certain screening or factor assumptions. This week's featured screen attempts to uncover stocks that Benjamin Graham may have found as attractive investments. Benjamin Graham noted the following characteristics for selecting attractive defensive stocks:
Graham believed that the defensive investor should select between 10 and 30 stocks that each have the following characteristics: large, prominent, and conservatively financed, with long records of continuous dividend payments. Such stocks should be purchased at attractive prices. As a yardstick, Graham suggested that the investor pay no more than 25 times average earnings over the past seven years, and no more than 20 times earnings over the last 12 months.
In order to create a factor screening model based on the above characteristics, Richard Tortoriello, a S&P Equity Analyst and author of Quantitative Strategies for Achieving Alpha, ran the screen on companies with a S&P Quality Ranking (pdf) greater than B+. S&P's database contains 430 U.S. companies with a Quality Ranking greater than B+. The specific screening factors used by Tortoriello are as follows:
● S&P Quality Ranking > B+
● 3-Year Average ROE > 18%
● Total Debt to Invested Capital < 20%
● Enterprise Value to 3-Year Average EBIT < 7
● Free Cash Flow to Invested Capital > 40%
The companies resulting from the screen are detailed in the below table.
(click to enlarge)
Exploring Quantitative Strategies ($)
Standard & Poor's
By: Richard Tortoriello, S&P Equity Analyst
February 25, 2009
(It should be assumed I have a long interest in Chevron, Exxon Mobil, Genuine Parts and Nike)