Towards a simple Ben Graham screen
Posted on February 25, 2009 by Richard Beddard
Filed Under Companies, Investing |
Debt to equity, or equity to total assets?
The pain! The pain! As promised, I’ve conjured up a list of bargain stocks using Ben Graham’s system, billed as the simplest way to select bargain stocks.
Although the requirements are simple enough:
- An earnings yield of more than twice the corporate AAA bond yield, and…
- Shareholders’ funds more than 50% of total assets
To my knowledge, there are no screens that combine these two variables for UK stocks, free, on the Internet.
Yet my goal was to automate Graham’s pre-Internet system, which required investors to look in newspapers and company reports or ask their stockbrokers for the data.
Condition one, in effect, prescribes a PE ratio of less than 10 (see yesterday’s blog for an explanation). All stock filters, like our own, include the PE. So, no problem there.
Condition two, a proxy for financial strength, is trickier. Our filter doesn’t include total assets or shareholders’ funds. DigitalLook’s does, but it doesn’t include the ratio of Shareholders’ funds to total assets, just the value of each.
This is what I did. Please suppress your laughter.
- I ran two screens. They were identical except the first screened companies with a market capitalisation of between £20m and £100m and the second screened companies with a market capitalisation of over £100m. I had to run two because the maximum number of results is 200 and nearly 400 companies met my other criteria which were…
- … A price earnings ratio below 10, gearing of less than 300%, shareholders funds of £0m and total assets of £0m. Including gearing limits the number of results to less than 400 and therefore the number of screens to run. Graham’s requirement for shareholders funds is like a gearing measure and certainly no company with gearing of significantly more than 100% would qualify1. Using values of zero for shareholders’ funds and total assets ensures they’re included in the results.
- I copied the two sets of results and pasted them into a spreadsheet, removing $ and € symbols for companies that report in those companies because the symbols prevent Excel from recognising the numbers and generally screw up calculations.
- I added a column calculating the ratio of shareholders funds to total assets and moved all companies with less than 50% shareholders’ funds to another sheet. The rump, 160 companies, qualifies as cheap, financially sound companies.
Hooray! Here’s the list on Google docs.
There’s bound to be a better way. Plenty of technically savvy people read Interactive Investor so I’m hoping somebody will help me find it 
2 .
It may be that gearing of 100% is an adequate measure of financial risk. Gearing compares gross borrowings and shareholders’ funds (i.e. what the company owes to what it owns) and, unlike Graham’s measure which effectively compares all liabilities (a broader measure of what it owes) to shareholders’ funds, gearing doesn’t include pension deficits and other claims that are not strictly debt.
Nevertheless, only two of the 162 qualifying companies had gearing of over 100%, so a simple screen:
- PE<10
- Gross gearing<100%
…Produces a very similar list.
Sadly, having got this far, my torment continues… There’s the small matter of which 30 stocks to pick from the 160, which I’ll look at tomorrow…
Footnotes:
- I excluded investment trusts too.
- The other option is to go cap in hand to a data provider, like Morningstar, which I must admit I’ve done for an article on the same subject for our sister publication Money Observer.
Comments
3 Responses to “Towards a simple Ben Graham screen”
Leave a Reply
[...] Thursday 26 Feb 2009 Home / Editors’ Blog About « « Towards a simple Ben Graham screen [...]
I been reading your column with some interest. If you look at sharelockholmes.com they have a screener which will give you the data you are looking for with regards to the ben graham data.
Thanks for the tip Bruce, I’ll check it out.