Benjamin Graham Portfolio for April

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In January I announced a new portfolio, a Benjamin Graham inspired value stock portfolio.  The purpose of the hypothetical portfolio is to track returns for a portfolio of 15 stocks selected based on a variety of valuation metrics.  The portfolio is re-balanced monthly, however, a quarterly or longer timeframe could be used as the rebalance point for those looking to lessen turnover.  I may also look to add an additional screening criteria in order to limit turnover in future months.

The criteria used to select the stocks are listed below.  The tools used to perform the screen and backtests are courtesy of  Stockscreen123 (“SS123”) and Portfolio123 (“P123″).

The actual screen factors are below:

•  Liquidity filter: No OTC Stocks
• Eliminate companies classified in the Miscellaneous Financial Services Industry, most of which are investment companies and funds and not the kind of stocks this all-star tended to seek
• Current ratio must be at least 1.5
• Long-term debt must be no higher than 10% above working capital
• EPS must be above breakeven in each of the last four quarters and in each of the last five annual periods
• Trailing 12 month EPS most be above EPS in the latest annual period
• EPS in the latest annual period must be above EPS in the prior year and five years ago
• The company must have paid common dividends in the last 12 months

The ranking system used as a basis for selecting the top 15 based among those stocks that pass the Graham screen are below:

• Valuation – 60% of total
• Trailing 12 month P/E (15% of this category)
• Price-to-Book (15% of this category)
• Price-to-Tangible Book Value (35% of this category)
• Operating P/E, defined as Market Capitalization divided by Business Income, which is Sales minus Cost of Goods sold minus Selling, General & Administrative Expense and omits unusual items (35% of this category)
• Earnings – 40% of total
• 5-year EPS Growth Rate (50% of this category)
• EPS Stability, defined as the standard deviation of EPS over the past 16 quarters, lower being better (50% of this category)

I began tracking this portfolio real-time on January 13th, 2012.  As of this writing, the portfolio is up 1.24% including dividends. A real-world application of this portfolio could also utilize stop losses in order to prevent large drawdowns in single positions. However, for the purposes of tracking the portfolio results all positions are bought and held until monthly rebalancing.

The current positions are listed below, along with the four positions being sold. New positions are italicized:

Below are the four positions sold using April 13th closing prices:

No current positions in stocks mentioned. The portfolio's real-time returns can be tracked using the link to the portfolio on the right-hand side of Scott's Investments. Closing prices on April 13th were used as entry/exit points for this months re-balance. Real results will differ and taxes/commissions will also impact results.

Below is the equity curve for this portfolio as compared to SPY (SPDR S&P 500):