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Graham creates tools of modern investing
Published on Saturday, Nov 14, 2009
He was a skier, bon vivant, ladies' man, Columbia University professor, hedge-fund manager and mentor to Warren Buffett.
Oh, yes, Ben Graham is also considered the father of ''value investing.''
Graham, who lived from 1894 to 1976, saw stock prices as behaving like planets revolving around the sun. The intrinsic value of a stock, like the sun, acts as a center of gravity. The stock's price can swing higher or lower but always ends up orbiting around the intrinsic value.
In his books Security Analysis (co-written by David Dodd and first
published in 1934) and The Intelligent Investor (1949), Graham introduced many of the tools of modern investing.
At Columbia and at Graham's hedge fund, the Graham-Newman Partnership, he taught and befriended Buffett, widely considered today's greatest investor. In an introduction to the latest (2003) edition of The Intelligent Investor, Buffett said Graham influenced him ''more than any other man except my father.''
Buffett wrote that Graham had ''virtually total recall'' coupled with ''unending fascination with new knowledge.''
Each year from 2001 through 2006, I wrote a column on stocks I believed Graham would have liked were he still alive. This year I revive the tradition.
I have designed a few criteria that I believe reflect the spirit, and to some extent the letter, of the maestro's methods.
Channeling Graham
What I call ''Graham stocks'' have a share price that's less than book value (corporate net worth) and less than 12 times earnings, as well as debt less than 50 percent of stockholders' equity.
Graham's own metrics were vastly more complex and numerous, and he allowed room for judgment. Also, because he did much of his investing in the 1930s and '40s, Graham was able to find some bargains the likes of which do not exist today.
Nonetheless, I think Graham would find some stocks to like if he were an active investor now.
One example is Tutor Perini Corp., a general contractor that specializes in large construction projects. It is based in Sylmar, Calif.
I like Tutor Perini's ability to tackle big and diverse projects. It has built hotels and convention centers, airport runways, solar plants, the police headquarters building in Los Angeles. The ability to take on difficult projects often confers some pricing power.
Last year, as the recession raged, Tutor Perini posted a loss. That's reason enough for some people to cross it off their list. Those folks don't care what earnings were two or three years ago — only what they are now and are projected to be next year. I think such thinking is short-sighted, and I believe Graham would agree.
I am interested in a company's earnings power over a prolonged time span. So was Graham. He advocated looking at a company's earnings over a period ''usually from seven to 10 years.''
When you take a long view, it seems evident to me that Tutor Perini is capable of earning powerful profits frequently, albeit not every year. The company has achieved a return on stockholders' equity of more than 20 percent five times in the past eight years.
I'm sure Graham would have liked Tutor Perini's price-to- earnings ratio of 6 and price-to-book ratio (stock price divided by corporate net worth per share) of 0.7.
Another stock I think Graham might choose is Boston Scientific Corp., at 0.9 time book value. Based in Natick, Mass., the company makes blood-vessel stents, defibrillators and other medical devices.
Questions about the safety and efficacy of drug-coated stents and the effectiveness of defibrillators have helped push the company's shares down from a 2004 high of more than $45 to about $8.25. Investors, in my view, are prone to panic over bad news — and I think Boston Scientific is such a case. While the stock price was falling during the past five years, the company increased its sales to $8 billion in 2008 from $5.6 billion in 2004.
Over the past seven years, Boston Scientific shares have fetched 27 times earnings on average. Today they sell for only 10 times earnings.
Renewed confidence
My next recommendation is Houston-based Rowan Cos., an oil and natural gas driller that also manufactures offshore rigs.
In October, Rowan announced it would resume building an offshore rig at its shipyard in Brownsville, Texas. Construction had been mothballed because Rowan wasn't willing to commit $120 million to finish building it, not knowing who would buy it and for what price.
The company said that an improving liquidity picture allowed it to spend the money to complete construction. It said it was confident it can sell the rig at a price that will bring ''an attractive return.''
To me, this tidbit is a sign that Rowan's finances are improving and its confidence is increasing. Rowan shares fetch seven times earnings and just under book value.
I'll close with Cabela's Inc., a retailer of hunting and sporting gear based in Sidney, Neb. The company, which was founded in 1961 and went public in 2004, knows the needs and habits of its clientele well. At nine times earnings and 0.9 times book value, I think it would feel comfortable to Graham.
Disclosure note: I have no long or short positions in any of the stocks discussed in this week's column, for myself or for clients.
John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. His firm or clients may own or trade securities discussed in this column.
He was a skier, bon vivant, ladies' man, Columbia University professor, hedge-fund manager and mentor to Warren Buffett.
Oh, yes, Ben Graham is also considered the father of ''value investing.''
Graham, who lived from 1894 to 1976, saw stock prices as behaving like planets revolving around the sun. The intrinsic value of a stock, like the sun, acts as a center of gravity. The stock's price can swing higher or lower but always ends up orbiting around the intrinsic value.
In his books Security Analysis (co-written by David Dodd and first
published in 1934) and The Intelligent Investor (1949), Graham introduced many of the tools of modern investing.
At Columbia and at Graham's hedge fund, the Graham-Newman Partnership, he taught and befriended Buffett, widely considered today's greatest investor. In an introduction to the latest (2003) edition of The Intelligent Investor, Buffett said Graham influenced him ''more than any other man except my father.''
Buffett wrote that Graham had ''virtually total recall'' coupled with ''unending fascination with new knowledge.''
Each year from 2001 through 2006, I wrote a column on stocks I believed Graham would have liked were he still alive. This year I revive the tradition.
I have designed a few criteria that I believe reflect the spirit, and to some extent the letter, of the maestro's methods.
Channeling Graham
What I call ''Graham stocks'' have a share price that's less than book value (corporate net worth) and less than 12 times earnings, as well as debt less than 50 percent of stockholders' equity.
Graham's own metrics were vastly more complex and numerous, and he allowed room for judgment. Also, because he did much of his investing in the 1930s and '40s, Graham was able to find some bargains the likes of which do not exist today.
Nonetheless, I think Graham would find some stocks to like if he were an active investor now.
One example is Tutor Perini Corp., a general contractor that specializes in large construction projects. It is based in Sylmar, Calif.
I like Tutor Perini's ability to tackle big and diverse projects. It has built hotels and convention centers, airport runways, solar plants, the police headquarters building in Los Angeles. The ability to take on difficult projects often confers some pricing power.
Last year, as the recession raged, Tutor Perini posted a loss. That's reason enough for some people to cross it off their list. Those folks don't care what earnings were two or three years ago — only what they are now and are projected to be next year. I think such thinking is short-sighted, and I believe Graham would agree.
I am interested in a company's earnings power over a prolonged time span. So was Graham. He advocated looking at a company's earnings over a period ''usually from seven to 10 years.''
When you take a long view, it seems evident to me that Tutor Perini is capable of earning powerful profits frequently, albeit not every year. The company has achieved a return on stockholders' equity of more than 20 percent five times in the past eight years.
I'm sure Graham would have liked Tutor Perini's price-to- earnings ratio of 6 and price-to-book ratio (stock price divided by corporate net worth per share) of 0.7.
Another stock I think Graham might choose is Boston Scientific Corp., at 0.9 time book value. Based in Natick, Mass., the company makes blood-vessel stents, defibrillators and other medical devices.
Questions about the safety and efficacy of drug-coated stents and the effectiveness of defibrillators have helped push the company's shares down from a 2004 high of more than $45 to about $8.25. Investors, in my view, are prone to panic over bad news — and I think Boston Scientific is such a case. While the stock price was falling during the past five years, the company increased its sales to $8 billion in 2008 from $5.6 billion in 2004.
Over the past seven years, Boston Scientific shares have fetched 27 times earnings on average. Today they sell for only 10 times earnings.
Renewed confidence
My next recommendation is Houston-based Rowan Cos., an oil and natural gas driller that also manufactures offshore rigs.
In October, Rowan announced it would resume building an offshore rig at its shipyard in Brownsville, Texas. Construction had been mothballed because Rowan wasn't willing to commit $120 million to finish building it, not knowing who would buy it and for what price.
The company said that an improving liquidity picture allowed it to spend the money to complete construction. It said it was confident it can sell the rig at a price that will bring ''an attractive return.''
To me, this tidbit is a sign that Rowan's finances are improving and its confidence is increasing. Rowan shares fetch seven times earnings and just under book value.
I'll close with Cabela's Inc., a retailer of hunting and sporting gear based in Sidney, Neb. The company, which was founded in 1961 and went public in 2004, knows the needs and habits of its clientele well. At nine times earnings and 0.9 times book value, I think it would feel comfortable to Graham.
Disclosure note: I have no long or short positions in any of the stocks discussed in this week's column, for myself or for clients.
John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. His firm or clients may own or trade securities discussed in this column.
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