The king is dead. Long live the king.
I’m referring to Benjamin Graham, father of value investing, Columbia University professor and hedge fund manager. Graham wrote the twin bibles of value investing, "Security Analysis" in 1934 (with David Dodd) and "The Intelligent Investor" in 1949.
Once a year, I give my best guesses about the stocks that this master investor would pick, were he alive today. Would the results have pleased Graham? I hope so, as the average 23-month return has been 15.8%, versus 11.5% for the Standard & Poor’s 500 Total Return Index.
Today, I believe Graham might invest in the five stocks I profile below.
Pinnacle Financial
Pinnacle Financial Partners Inc. (PNFP, Financial) owns Pinnacle Bank, which serves all the major cities in Tennessee – Chattanooga, Knoxville, Memphis and Nashville. It has shown consistent growth in both revenue and earnings, yet its stock sells for only nine times earnings.
Investors are skittish about the whole banking industry, mostly because short-term interest rates are currently above long-term ones. That’s a poisonous situation for banks, which typically “borrow short and lend long.” The problem is real, but I think temporary.
U.S. Steel
Most people think of United States Steel Corp. (X, Financial) as a has-been. Maybe, but the nation needs to rebuild its bridges and tunnels, not to mention cars, ships and skyscrapers. The past two years have been good ones for this former behemoth.
The stock is surpassingly cheap, selling for four times earnings and half of book value. Wall Street analysts are evenly split on the stock, with eight saying “buy” and seven saying “hold,” “underperform” or “sell.” I like to see divergence of opinion, as it leaves room for pleasant surprises.
Seaboard
Seaboard Corp. (SEB, Financial) is a small conglomerate controlled by the Bresky family. It raises pigs, trades commodities and engages in ocean shipping in South America and the Caribbean.
As further sidelines, it grows sugar in Argentina and produces electricity in the Dominican Republic.
An ungainly hodge-podge? You might say so, but the company has a 23-year profit streak going and has shown a profit in 29 of the past 30 years. The stock sells for 10 times earnings and 0.8 times book value.
Eastman Kodak
Like U.S. Steel, Eastman Kodak Co. (KODK, Financial) is a once-mighty company reduced to humble circumstances. It was king of the camera market for decades, but traditional cameras have been replaced by smartphones as people’s favorite way of making pictures.
Kodak went bankrupt in 2012, and had to completely change its stripes. It now gets more than half its revenue from printing. It’s also in chemicals and advanced materials (such as light-blocking fabric and battery coating substrates). The stock sells for 7 times earnings and less than half of book.
Hanmi Financial
I started today’s roster with a bank stock, and I’ll end with another one. Hanmi Financial Corp. (HAFC, Financial) is a Los Angeles-based regional bank that caters especially to Korean-Americans.
One concern for both Pinnacle and Hanmi is the problem in commercial real estate. About 39% of Pinnacle’s loans and 36% of Hanmi’s are in this area. Rising interest rates and the work-at-home trend are hurting commercial real estate owners, so some of these loans may go sour.
Nonetheless, Hanmi has been profitable 12 years in a row, and profitability has improved lately. At 6 times earnings, I think this stock is a good value, and perhaps Graham would think so too.
The criteria
To be eligible for consideration as a Graham stock, I require a stock to:
- Sell for less than 12 times per-share earnings.
- Sell for less than stated book value (corporate net worth per share) and less than 1.5 times tangible book value (which excludes intangibles such as goodwill.)
- Have debt less than 50% of book value.
The record
I’ve attempted to channel Graham’s ghost 20 times, beginning in 2001. Of the 20 columns, 13 were profitable and 14 beat the Standard & Poor’s 500 Total Return Index.
In the past year, my Graham picks rose 7.6%, which is about half of my long-term average of 15.8%. However, it was good enough to beat the index, which came in at 5.6%.
Meritage Homes Corp. (MTH, Financial) did best, returning 64%. The worst laggard was Farmers & Merchants Bank of Long Beach (FMBL, Financial), down 36%.
Unum Group (UNM, Financial) did well with a 30% gain. But Kelly Services Inc. (KELYB, Financial) had a 5% loss and Seneca Foods Corp. (SENEA, Financial) dropped 17%.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
