Strategy

In ’49, Graham enumerated some of today’s most popular fundamental ratios in a single selection methodology. The number of stocks that qualify are typically small, but historical results have been rewarding. The screener starts with a requirement that the company has been consistently paying dividends. To achieve this we impose a Dividend Growth Rate (5 year average) greater than or equal to 0%. This leads to a universe of dividend-paying stocks only. This is a fundamental measure of a company’s real growth rate. To counteract any negative affect on real growth that may have been the result of dividend payouts in lieu of investment in growth, we look for stocks that have averaged annualized Earnings per Share growth over the last 5 years of 3% or more. Earnings per Share, or EPS, is the net income minus dividends, divided by the number of outstanding shares. To target value opportunities, we limit the range of the Price/Earnings Ratio to less than or equal to 15%. We use the most timely trailing twelve months (TTM), intra-day ratio to watch for today’s best candidates. The Price/Earnings Ratio is a comparison of a company’s current share price to its earnings per share during the specified time period. As value investors, we wish to ignore overbought – and thus overpriced – stocks. Note that companies with negative earnings do not have a P/E Ratio. To further ensure the Reasonable Price aspect of GARP, we look for a Price/Book Ratio less than or equal to 1.5. This ensures that the market-driven stock price, when divided by the financial statement’s book value per share is in acceptable range for a value investment. Value is good, but we need to ensure that the companies chosen have healthy and normal operational revenues. We impose a criterion of trailing twelve months (TTM) Revenue of greater than or equal to $400M. Finally, we use the Current Ratio to identify companies that do not have short-term debt obligation problems. The Current Ratio is the company’s current assets divided by current liabilities. As we have been focusing on value, we need to counter-balance the earlier selection filters with one that offers an indication of financial stability. We will set it to greater than or equal to 2.