Benjamin Graham Stock Screener for Enterprising Investors
This article on Benjamin Graham stock screener for enterprising investors was written by Luis C. Sánchez. Luis is a lawyer and private investor in Bogotá, Colombia who focuses on net net stocks. He is an expert in corporate law and he passed the CFA Level I exam. He manages stocks for his personal account and for clients. Article image (creative commons) by Anssi Koskinen, edited by the Net Net Hunter.
Would Benjamin Graham use a stock screener if he were alive today?
Keep in mind that not all value investors use stock screeners to get ideas — Warren Buffett and Charlie Munger certainly don’t.
But Graham would definitely need a stock screener today. In fact, his favourite screener would focus exclusively on net nets — i.e., stocks selling at prices below their net current asset value (NCAV).
Benjamin Graham Stock Screener: Low Price to NCAV
Why do investors use stock screeners, anyway?
As of 2018, there were 42,099 listed companies worldwide, of which 4,397 were in the US stock markets.
All these companies file financial information at least once a year, and most file quarterly.
Even if you only invest in the US stock markets, you can’t possibly study all the financial information available for each stock simultaneously.
You need a stock screener to narrow that universe to a manageable size. Then, you can study selected companies in depth.
A stock screener is just a tool most analysts use to filter the universe of stocks according to a set of criteria — just like Graham and his team did, only easier and faster.
Buffett and Walter Schloss worked for Benjamin Graham back in the ’50s.
What exactly did Buffett and Schloss do?
“We would look up stuff and read. We would go through Standard & Poor’s or a Moody’s Manual and look at companies selling below working capital,” Schloss said.
By “selling below working capital,” Schloss meant below NCAV.
That means Graham’s first and most important “screening” filter was price — stocks with a low price to NCAV or, simply, net nets.
Back then, there were no more than 2,000 listed American companies. Graham and his team basically “screened” the market manually to find net nets.
Now you see why Graham would need a stock screener today.
But why a stock screener focused on net nets?
Benjamin Graham Stock Screener: Focus on Net Nets
Ben Graham partnered with Jerry Newman in 1926, and they ran Graham-Newman together for almost 40 years.
They invested in arbitrages, liquidations, related and unrelated hedges, and net nets. Net nets were stocks selling at two-thirds of their NCAV — i.e., the value of current assets less all liabilities, preferred stock, and off-balance sheet debt.
They bought a group of net nets — sometimes holding as many as 100 — and patiently waited for them to reach NCAV, then sold.
Graham kept a very detailed record of the results of their different investment strategies for many years and eventually came to the conclusion that the returns of a basket of net nets far outweighed the other strategies’ returns.
Schloss said that when Graham found out he could make money by just buying a basket of stocks at two-thirds of their liquidation value, “he kind of lost interest.”
Graham certainly thought it was a very simple method:
“My first, more limited, technique confines itself to the purchase of common stocks at less than their working capital value, or net current asset value, giving no weight to the plant and other fixed assets and deducing all liabilities in full from the current assets. … I consider it a foolproof method of systematic investment — once again, not on the basis of individual results but in terms of the expectable group outcome.” [A Conversation With Benjamin Graham, Financial Analyst Journal, 1976.]
Given the extraordinary results, Graham-Newman eventually focused exclusively on net nets:
“At this point let me consider briefly an approach with which we were closely identified when managing the Graham-Newman fund. This was the purchase of shares at less than their working capital value. That gave such good results for us over a forty-year period of decision making that we eventually renounced all other common-stock choices based on the regular common stock procedures, and concentrated on these ‘sub-asset stocks.’ ” [The Decade 1965-1974; Its Significance For Financial Analysts, Benjamin Graham, 1975.]
This is strong evidence suggesting that Graham would actually use a stock screener focused exclusively on net nets today.
Benjamin Graham Stock Screener: Qualitative Criteria
Graham’s net net selection criteria were clearly on the quantitative side of the spectrum, but he added some qualitative criteria as well.
Reflecting on the importance of qualitative factors, Graham said:
“Much more difficult [than finding cheap stocks] is the task of determining whether or not the qualitative factors will justify following the quantitative indications—in other words, whether or not the investor may have sufficient confidence in the company’s future to consider its shares a real bargain at the apparently subnormal price.” [“Security Analysis, Sixth Edition,” by Benjamin Graham and David Dodd, The McGraw-Hill Companies, 2009, p. 675.]
In other words, a cheap price is not enough to justify a purchase. You need to be comfortable with the business’ prospects.
If the business is burning its intrinsic value at a fast pace, or you see management living off the business — i.e., with very high salaries and additional compensation — or there’s a reason to believe the company is not operating a real business, you should pass.
In these cases, even if the price looks cheap, the stock is not actually a bargain.
On this matter, Graham concluded:
“Common stocks that (1) are selling below their liquid-asset value, (2) are apparently in no danger of dissipating these assets, and (3) have formerly shown a large earning power on the market price, may be said truthfully to constitute a class of investment bargains. They are indubitably worth considerably more than they are selling for, and there is a reasonably good chance that this greater worth will sooner or later reflect itself in the market price. At their low price, these bargain stocks actually enjoy a high degree of safety, meaning by safety a relatively small risk of loss of principal.” [“Security Analysis, Sixth Edition,” by Benjamin Graham and David Dodd, The McGraw-Hill Companies, 2009, p. 570.]
So Benjamin Graham’s stock screener would actually have to filter net nets based on the additional criteria Graham would use to increase the probability of actually picking winners.
At Net Net Hunter, we actually do that for you. That’s why we believe this would be Benjamin Graham’s favourite stock screener if he were alive today.
Benjamin Graham Stock Screener: Shortlist of Net Nets
If you’re a small private investor like me, you probably also have a job and a family.
You want to manage your net net portfolio, but your time is limited. Your resources, too — professional databases of financial information are expensive, typically $30,000 USD per year.
A subscription to Net Net Hunter costs a fraction of that. Plus, we do all the screening process for you. We save you hours of labour at a price that fits your investment budget.
Let me show you how we do that.
Each month, we spend more than 20 hours combing through the approximately 1,000 stocks on the Raw Screen by hand in order to come up with the best investable net net stocks to focus your research on.
The result is a monthly Shortlist we send to our members.
We screen stocks based on “Buyability” and “Investment Quality Factors.”
Regarding Buyability, there is no point including a stock on our Shortlist if you can’t buy it. That’s why we look for stocks with at least $1,000 average daily volume and a minimum price.
Investment Quality Factors include a two-thirds discount to NCAV per share, low debt to equity ratio, low burn rate — i.e., the company is not eating up its value — a small market cap, and a current ratio above 1.5x, among others.
This set of criteria closely follow Graham’s net net investing strategy.
While Graham had two or three analysts combing through the manuals to find net nets, you only need Net Net Hunter to do that for you — just like your own personal analyst!
Net Net Hunter helps you find these net nets based on Graham’s solid criteria so that you can form your own net net portfolio and benefit from the long-term extraordinary returns of this investment strategy — plus, it saves you time and money.