04/09/2013 22:28 Legendary Investor Playbook: 37 Stocks From Seven Masters: Graham, Buffett And Lynch - Forbes

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INVESTING | 9/04/2013 @ 11:46AM | 3,808 views
Legendary Investor Playbook: 37
Stocks From Seven Masters:
Graham, Buffett And Lynch
Tina Russo, Forbes Staff
PAGE 2 OF 4
Like Peter Lynch, Zweig is another legendary investor who decided to step
out of the limelight while he was at the top of his game. However, the
American Association of Individual Investor dissected his stock picking
strategy and has used it as one of its benchmark stock picking screens for
more than a decade. AAIIs growth and value Martin Zweig screen has
returned 19.2% since inception in 1998 versus 3.6% for the S&P 500 during
the same period.
While Zweig had more than a dozen rigorous criteria in selecting stocks, much
of his focus was on earnings growth, particularly zeroing in on companies
whose earnings per share were not just growing, but growing at an increasing
rate. He also sought out companies with reasonable price-earnings ratios and
a bit of momentum working for them.
Insider buying was another important attribute. Interestingly, Zweig didnt
want companies too cheap or too dear. He refused to consider companies with
price-earnings ratios below five and more than three times the market P/E.
We ran a screen using AAIIs Stock Investor Pro software. Seven companies,
including Georgia-based Heritage Financial Group (HBOS), credit-rating
service Moodys (MCO) and media company
Comcast (CMCSA), passed the screen based on
Zweigs strategy using the following criteria.
Same-quarter year-over-year growth in fully diluted
earnings from continuing operations is positive.
(Applicable for each of the last four quarters)
Same-quarter year-over-year growth in sales between
the last fiscal quarter and the same quarter one year prior
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04/09/2013 22:28 Legendary Investor Playbook: 37 Stocks From Seven Masters: Graham, Buffett And Lynch - Forbes
Page 2 of 6 http://www.forbes.com/sites/investor/2013/09/04/legendary-investor-strategies-and-stock-picks/2/
is positive. (Applicable for each of the last four quarters)
The current (12 month) fully diluted earnings from
continuing operations is greater than or equal to the fully
diluted earnings from continuing operations for the last
fiscal year (Y1)
The fully diluted earnings from continuing operations
for the last fiscal year (Y1) is greater than the fully diluted
earnings from continuing operations from two years ago
(Y2)
The fully diluted earnings from continuing operations
from two years ago (Y2) is greater than the fully diluted
earnings from continuing operations from three years ago
(Y3)
The annualized growth rate in fully diluted earnings
from continuing operations over the last three years (3yr)
is greater than or equal to 15%
The annualized growth rate in sales over the last three
years (3yr) is greater than or equal to 15%
Same-quarter growth in fully-diluted earnings from
continuing operations between the last fiscal quarter (Q1)
and the same quarter one year prior (Q5) is greater than
the growth rate in fully diluted earnings from continuing
operations between the sum total of the prior three fiscal
quarters (Qs 2-4) and the same three quarters one year
ago (Qs 6-8) or the same-quarter growth in fully-diluted
earnings from continuing operations between the last
fiscal quarter (Q1) and the same quarter one year prior
(Q5) is greater than or equal to 30%
Same-quarter growth in fully-diluted earnings from
continuing operations between the last fiscal quarter (Q1)
and the same quarter one year prior (Q5) is greater than
the growth rate in fully diluted earnings from continuing
operations over the last three years (3yr)
The price-earnings ratio is greater than 5 but less than
1.5 times the median price-earnings ratio for the entire
Stock Investor database
The relative price strength over the last 26 weeks is
positive
Those companies that are American Depository
Receipts (ADRs) are excluded
Those companies that are part of the miscellaneous
financial services and real estate operations industries are
excluded
The average trading volume for the last 3 months ranks in the top 75% of the
entire Stock Investor database.
Click here for 37 Stocks Legendary Investors Would Love
Warren Buffett is widely considered to be one of
the greatest investors of all time, but if you were
to ask him who he thinks is the greatest investor,
he would probably mention one man: his teacher
Benjamin Graham.
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04/09/2013 22:28 Legendary Investor Playbook: 37 Stocks From Seven Masters: Graham, Buffett And Lynch - Forbes
Page 3 of 6 http://www.forbes.com/sites/investor/2013/09/04/legendary-investor-strategies-and-stock-picks/2/
Ben Graham, the father of value
investing
Graham was an investor and investing mentor
who is generally considered to be the father of
security analysis and value investing. His ideas
and methods on investing are well documented
in his books Security Analysis (1934) and The
Intelligent Investor (1949), which are two of the
most famous investing books.
Graham felt that it would be difficult for
investors to beat the market, that is, to find
stocks that will do much better than the overall
long-term market average. Stocks that will do
better than average over the long term are those with greater growth, but the
difficulty is finding those in advance.
The problem for investors, he reasoned, is twofold. First, even stocks with
obvious growth prospects dont necessarily translate into extra profits for an
investor because those prospects are incorporated into the price of the stock.
Second, there is the risk that the investor will be wrong about the firms
growth prospects. Graham felt that this risk is accentuated by the psychology
of the stock market, where the tides of pessimism and euphoria that sweep
the market can mislead investors into overvaluing or undervaluing a stock.
In short, over the long term most investors can only expect an average return,
but there is the added risk of underperformance due to misjudgment.
Instead of seeking a way to produce above-average returns, Graham proposes
a method to reduce the risk of misjudgment. He suggests that investors first
determine an intrinsic value for a stock that is independent of the market.
Graham never fully explains how to determine intrinsic value and admits
that it requires considerable investment judgment. However, he feels that a
firms tangible assets were a particularly important component; other factors
included earnings, dividends, financial strength and stability. Investors
should limit their purchases to stocks selling not far above this value, while
stocks selling below their intrinsic value would offer an even better margin of
safety to investors.
According to Graham, individual investors fall into two camps: defensive
investors and aggressive or enterprising investors. These two groups are
distinguished not by the amount of risk they are willing to take, but rather by
the amount of intelligent effort they are willing and able to bring to bear on
the task. Thus, for instance, he includes in the defensive investor category
professionals (his examplea doctor) unable to devote much time to the
process and young investors (his examplea sharp young executive interested
in finance) who are as-yet unfamiliar and inexperienced with investing.
Graham feels that the defensive investor should confine his holdings to the
shares of important companies with a long record of profitable operations and
that are in strong financial condition. By important, he means one of
substantial size and with a leading position in the industry ranking among the
first quarter or first third in size within its industry group.
04/09/2013 22:28 Legendary Investor Playbook: 37 Stocks From Seven Masters: Graham, Buffett And Lynch - Forbes
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The Oracle of Omaha
Aggressive investors can expand their universe substantially, but purchases
should be attractively priced as established by intelligent analysis. He also
suggests that aggressive investors avoid new issues.
In order to find stocks that Graham might buy today, Forbes used AAIIs
Stock Investor Pro service Graham Enterprising Investor screen, which is
based on the criteria below. AAIIs Graham screen has a 10-year return of
25.2% versus 5.5% for the S&P 500.
The price-to-earnings ratio is among the lowest 10% of the database (percent
rank less than or equal to 10)
The current ratio for the last fiscal quarter is greater than or equal to 1.5
The long-term debt to working capital ratio for the last fiscal quarter is greater
than 0% and less than 110%
Earnings per share for each of the last five fiscal years and for the last 12
months have been positive
The company intends to pay a dividend over the next year (indicated dividend is
greater than zero)
The company has paid a dividend over the last 12 months
Earnings per share for the last 12 months and the last fiscal year is greater than
the earnings per share from five years ago
The price-to-book ratio is less than or equal to 1.2
Only three stocks passed the criteria, all of which are based outside of the
U.S.: Sun Hung Kai Properties (SUHJY), Nam Tai Electronics (NTE)
and Lukoil (LUKOY).
Arguably the best and the best-known investor
of our time, Warren Buffett is also one of the
worlds wealthiest individuals with a net worth
of more than $53 billion, composed mainly of
his holdings of Berkshire-Hathaway, a
struggling textile company he acquired in 1965.
Back then, shares traded for $18, and today the
stock, which never split, will run you about
$168,000.
Born in 1930 the son of a U.S. Congressman and
stockbroker, Buffett comes from a comfortable
but hardly extravagant background in Omaha, Neb. He graduated from the
University of Nebraska in 1950 and then, inspired by reading The Intelligent
Investor by Benjamin Graham, he studied under Graham at Columbia
University where he received a graduate business degree in 1951. After
Columbia, Buffett got started in the investment business, selling securities for
Buffett-Falk & Company until 1954.
Buffett stayed in close touch with Graham, and his former professor gave him
a job with his firm, Graham-Newman Corp., where Buffett worked as an
analyst from 1954 to 1956. Here, working alongside Graham, Buffett
sharpened his skills as a value investor. He went back to Omaha in 1956 to
form a family investment partnership, which he dissolved in 1969.
04/09/2013 22:28 Legendary Investor Playbook: 37 Stocks From Seven Masters: Graham, Buffett And Lynch - Forbes
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Page 1 2 3 4 Previous Page Next Page
Buffett does not buy stocks as much as he buys businesses. His style of value
investing obviously encompasses many of the principles handed down to him
by his mentor, Graham. At the heart of Buffetts simple but highly effective
strategy is having the discipline to recognize when the market is not properly
reflecting the true long-term value of a particular business, which can be
calculated by discounting its likely future cash flows at an appropriate
discount rate.
Click here for 37 Stocks Legendary Investors Would Love
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