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Bargain companies revealed

Posted on February 27, 2009 by Richard Beddard
Filed Under Companies, Markets |

Shares other investors are selling

On this blog, I try to understand the risks of investing and expect that if I can select companies where there is little risk, the reward will follow.

So, it’s no surprise that many of the companies I’ve profiled in recent months fit Benjamin Graham’s criteria for bargain stocks.

I’ve spent much of the week writing an article about them for Money Observer, and on this blog:

  1. Benjamin Graham’s system explained: buying companies that are cheap, but sound.
  2. Screening for stocks that meet the criteria.
  3.  A Thrifty Thirty, the thirty stock portfolio.

Graham’s criteria reduce the risk of paying too much for shares and the risk of buying shares in a company that is financially week1 but that’s not the same thing as saying every stock in the portfolio will be a winner. Graham predicted that the system would return 15% a year over periods of five years or more.

However, the companies identified by the screen are counterintuitive. These are, after all, shares other investors are selling, which is why the prices are so low.

Just to give you a flavour, here’s a round-up of the kind of company you’d be investing in, if you insisted on a PE ratio of less than 10, and that the company owned at least twice what it owed. Thrifty investments, in other words:

Footnotes:

  1. The third risk, that a company’s earning power will be lower in future, either because its product becomes obsolete or commoditised, or because of bad management, is much harder to quantify. I explained one method last week.
Category: Companies, Markets

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