Reading "Security Analysis" by Benjamin Graham is a good idea. For the absolutely dedicated value investor, it’s required reading. The edition with the forward by his student Warren Buffett (Trades, Portfolio) is probably the best version to pick up.
The problem for the modern era is that the book was written just after the Great Depression and first published in 1934.
Issue 1: When Professor Graham was writing, plenty of value stocks could be identified. In 2021, that is no longer the case.
Issue 2: The writing style of early 20th Century business school is dense and often sleep-inducing for those raised on social media, rock music or streaming videos.
The shorter value investing book from Graham, "The Intelligent Investor," is easier to get through. Published in 1959, the version with an introduction by business journalist Jason Zweig is recommended reading for anyone serious about the stock market.
I read it back in the 1970’s, took notes and, although I didn’t absorb everything – I was a philosophy major at the time – here’s what I did take away from the read:
1. Low price-earnings ratio
The investor should only be looking at stocks with low price-earnings ratios. This is generally understood to mean those equities with price-earnings ratios lower than that of the market as a whole. For example, if you think the S&P 500 can be used as “the market as a whole” and its price-earnings ratio is 30, then investors would be better off researching stocks with price-earnings ratio of less than that. Another way of looking at it would be to determine the price-earnings ratio of stocks within a sector, and if one can be identified as having a lower multiple than the sector’s average, then that one might be worth pursuing.
2. Near, at or below book value
If you can identify stocks trading near, at or below book value, you are likely to be on your way to finding decent value. Basically speaking, this means companies available for purchase at or less than what they’re worth according to their financial statements. When I first read about such things in Graham’s book, I was astonished that such stocks existed. After reading his work and spending some time in the library with Standard & Poor’s books, I discovered how possible it was – not like during Graham’s era, but enough to make it interesting.
3. Companies making money
The Professor liked companies that were making money. He looked for earnings growth in the current year and for a record of earnings growth over the last few years. This is another item that astonished me when I first read his thoughts on it: that a company selling for less than its book value could have earnings. Again, combing through the S&P materials at my library, I found such stocks existed.
4. Debt under control
Graham had a lot of thoughts about debt, but the one thing I understood was this: a company with long-term debt that is less than its shareholder equity has a better chance of surviving than one that doesn’t. He meant surviving over the long-term, as I recall, a tenet of the type of investing he recommended. The idea was to stay away from those equities operating under a heavy load of debt.
5. Paying a dividend
One of the clear basics of value investing for Professor Graham was this: a value stock should be paying a dividend. A company that thinks enough of its shareholders to reward them every three months with a bit of the money being made is on the right track.
There was a lot more in the book, but those five were key basics that I took away. With that in mind, below are three stocks that now seem to qualify as value stocks using the above criteria:
1. HarborOne Bancorp
HarborOne Bancorp (HONE, Financial) trades on the NYSE with a price-earnings ratio of 11.46, much less than the current S&P 500’s 40. The regional bank stock is priced at a 1% discount to its book value. Earnings this year grew at a 151% rate and the past five-year record is a positive 50%. Shareholder equity vastly exceeds long-term debt. Harbor One pays a 1.48% dividend yield.
2. SuRo Capital Corp
SuRo Capital Corp (SSSS, Financial) is NASDAQ-traded with a price-earnings ratio of 1.4 and at a 26% discount to book value. Earnings per share growth is 233% this year. The five-year EPS growth rate is 51.2%. The company has no long-term debt. SuRo is paying a dividend that yields 25% right now – how long such a high dividend could continue would require further research. The company invests in venture-backed private companies. Average daily volume of less than 500,000 shares makes it difficult for large institutional traders to be involved.
3. Grupo Supervielle
Grupo Supervielle (SUPV, Financial) is an Argentina-based banking operation traded on the NYSE. With a price-earnings ratio of 5.78 and priced at about half its book value, it might be worth a look. Earnings per share this year grew at a 185% pace. Over the past five years, the EPS growth comes in at 22.5%. Shareholder equity greatly exceeds long-term debt. The banks pays a 1.55% dividend yield.
