Benjamin Graham gave us 5 ways that a large cap stock is undervalued:
- The company must be large – more than $10 billion market cap in the US or a member of the FTSE 100 for UK stocks
- The company ought to be going through a period of unpopularity – activist shareholder revolt, missed/ reduced earnings, a lawsuit
- The stock price needs to have been declining – a quick look at the 5 year chart should tell you very quickly whether this is true or not
- The current PE ratio should be no more than 20 – this is to ensure that you are not paying too high a price for your stock based on its earnings
- The current PE ratio is at a discount to it past average PE ratio – the current PE ratio should be significantly below the 5 or 10 year average.
Is Large Cap Investing For Lazy People?
Let me ask you a question: if someone gave you a list of potentially undervalued stocks using a set of criteria from a person who holds the title father of value investing and who was the mentor of Warren Buffett – would you give a crap?
I’m quite sceptical so my guess is that most people will not.
For self-directed (read motivated) individuals that have an entrepreneurial streak then the answer should be a resounding “YES”!
Fortunately, if you’re a bit lazy like me and still consider yourself motivated as I do then help is at hand: Graham’s large cap strategy is the simplest to get your head around because it requires the least amount of work.
Don’t believe me? Check these 2 posts out for more:
- Testing Benjamin Graham; First Quarter Results 2013
- Here’s A Quick Guide To One Of Ben Graham’s Investing Strategies
Screening For Undervalued Large Caps
Here’s a screen of US large caps I’d like to share as a result of the recent sell-off in global equities that I did this weekend:
|Symbol||Name||M Cap (mil)||PE (5-Y Avg)||PE/5-Y Avg(%)||PE-Ratio||PE (5-Y High)||PE (5-Y Low)||DPS($)||High|
|DD||E.I DU PONT DE NEMOURS||51,353||14.4||78||11.3||23.9||8.4||1.7||57.25|
|CF||CF INDUSTRIES HOLDINGS||11,322||11.1||58||6.5||26||3.1||1.6||194.25|
|CCU||CLEAR CHANNEL COMM INC||17,914||22.3||49||10.9||33.9||16.8||0.94||36|
A strict interpretation of Graham’s criteria would mean that only Clear Channel, PPG Industries, Newmont Mining, Yahoo! and Hollyfrontier would be considered as undervalued since their current PE ratios are trading at a 50% or more discount to their 5 year average according to the screener.
Today It’s Over To You
Ok self-starters, do any of these stocks have investment merits?
I’ve shown you Graham’s investment criteria and run a screen during a market sell-off because I’d love to hear if your thoughts on this investment strategy.
What do you think? Have you seen these 5 criteria in undervalued large cap stocks before? Are they simple to understand? Which criteria made the most impact? Would you add more criteria to the list?
Jump in everyone! As I love nothing more than discussing stocks and their investment merits, so please leave your thoughts in the comments box below.
Image: Per Cent 5