Benjamin Graham Bear Market Stocks
Benjamin Graham described a mania as “the complete insulation of all lessons of history whether remote or directly at hand.” Security prices can become disconnected from intrinsic value just as easily during a severe market downturn. Graham observed that the clear-cut undervaluation of leading companies typically only occurs during bear markets. His most basic approach looked for stocks trading with a low price-to-net-current-assets ratio. The ratio compares the current stock price to current assets (cash, accounts receivable, inventory, etc.) less all debt, both short- and long-term including preferred stock.
The First Cut calculation modifies this ratio to add long- and short-term investments to assets. Graham recommended that a stock be purchased only if the price was two-thirds or less of net current assets. However, even during today’s bear market, it is rare to find a stock selling that cheaply unless it is in financial trouble. The First Cut simply screens for S&P 500 stocks with a low ratio of price to net current assets. Stocks in the financial sector were excluded because their financial statements are not directly comparable to other industries.
To help eliminate firms in financial trouble, all of the First Cut stocks have positive earnings along with positive cash flow from operations for the most recent fiscal year and over the last four quarters. Stocks are also required to have debt levels below their industry norm.
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