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Sunday, November 18, 2007

7 steps at how Benjamin Graham chooses his stocks

You may want to look at an Introduction to Benjamin Graham first.

Adequate Size of the enterprise

All our minimum figures must be arbitrary and especially in the matter of size required. Our idea is to exclude small companies which may be subject to more than average vicissitudes especially in the industrial field. (There are often good possibilities in such enterprises but we do not consider them suited to the needs of the defensive investor.) Let us use round amounts: not less than $100 million of annual sales for an industrial company and, not less than $50 million of total assets for a public utility.

A sufficiently string financial condition

For industrial companies current assets should be at least twice current liabilities- a so called two-to-one current ration. Also, long-term debt should not exceed the net current assets (or “working capital”). For public utilities the debt should not exceed twice the stock equity (at book value).

Earning stability

Dividend recordUninterrupted payments for at least the past 20 years

Dividend record

Uninterrupted payments for at least the past 20 years

Earnings growth

A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.

Moderate price/earning ratio

Current price should not be more than 15 times average earnings of the past three years

Moderate ratio of price to assets.

Current price should not be more than 1½ times the book value last reports. However, a multiplier of earning below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5. (This figure corresponds to 15 times earnings and 1½ ties books value. It would admit an issue selling at only 9 times earning and 2,5 times asset value, etc.)

Source: Benjamin Graham - The intelligent Investor