Introduction
The Graham Enterprising Investor screen focuses on the valuation as well as the companies that exhibit solid financial strength. Additionally, the company shall be highly liquid and should pay a dividend. This filters out the low quality companies and we are presented with stocks that may be undervalued but have good quality operations.
In this screen, we focused on the mid cap stocks that satisfy the Graham Enterprising Investor screen criteria.
Screen Details
This screen looks for mid cap stocks between $2 billion and $5 billion in market capitalization with good valuation and quality operations. The quality of the operation can be judged by a continuous profitability, presence of a dividend and good liquidity as exhibited by the current ratio:
- Dividend Yield > 0
- Current Ratio > 1.5
- Long Term Debt/(Current Assets - Current Liabilities) between 0 and 1.1
- EPS > 0 for each of the previous 5 years
- EPS now > EPS 5 years ago
- P/E Ratio in the lowest 30% of the sector
The Screen Results
Stock | Company | Dividend Yield | P/E Ratio | Current Ratio |
|---|---|---|---|---|
AVX | AVX | 3.0% | 11.4 | 6.1 |
CMC | Commercial Metals | 2.5% | 11.7 | 3.0 |
FL | Foot Locker | 3.4% | 9.6 | 2.0 |
GEF.B | Greif | 5.5% | 13.0 | 1.6 |
KFY | Korn Ferry | 1.1% | 11.4 | 2.4 |
MDC | M.D.C Holdings | 3.0% | 12.5 | 7.0 |
RBC | Regal Beloit | 1.6% | 12.8 | 2.8 |
SHO | Sunstone Hotel Investors | 1.4% | 14.8 | 7.0 |
WYND | Wyndham Destinations | 3.8% | 10.1 | 2.9 |
Notes and Observations
- AVX: The electric/electronic components manufacturer is selling at the low end of its multiple ranges. Given that most of its revenue comes from Asia, there is some risk due to the trade war. One of the cheaper companies in its sector
- CMC: Commodities and metals market is also under duress as China slows and the trade war triggers a global slowdown in the economic activity. Many stocks in the steel sector are at a cyclical down turn and could be an attractive hold during the next few years.
- FL: Very good value and solid operation. The sentiment surrounding the stock stinks. This could be a great counter trend purchase if you believe Amazon effect is overplayed. Worth adding to the watchlist.
- GEF.B: Industrial packaging demand will slow if the industrial production slows. While the valuation is good, there are elevated risks. Does the 5.5% dividend yield sufficiently compensate for a potential industrial recession? I will pass for now
- KFY: Good valuation for a staffing company but I will pass due to recession concerns. Additionally, we are almost full employment. The company has experienced a declining EPS growth rate in the last 5 years.
- MDC: Worries about a potential real estate downturn (many markets are overheated) will keep me away from this and other residential home builders.
- RBC: I like the stock and its valuation. Will add to the watchlist to review deeper.
- SHO: Pass on the hotel/motel REITs. The few recession proof REITS to consider would be the medical REITs and possibly quality anchored Retail REITS.
- WYND: WYND sells vacation ownership interest (timeshares). I expect the business to be durable with switching costs quite high. The valuation is decent but the company has had some sales declines in the recent years. Pass for now.
Ending Note
We have 2 stocks that are being added to the watchlist for further review. This is a good yield screen and works best on well established companies and sectors. Adds conservatively run assets to your portfolio
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