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number cruncher

What are we looking for?

Let's get an update of a U.S. portfolio we created in April, 2010, using the strategy of the late Benjamin Graham.

The Graham approach

Known as the father of value investing, Mr. Graham honed his stock-picking skills during the Great Depression and tried to buy stocks at a discount to their "intrinsic value." In his highly influential book, The Intelligent Investor, he recommended focusing on companies with little debt and relatively low price-to-earnings ratios.

"Graham used a conservative, risk-averse approach that focused as much on preserving capital as it did on producing big gains," according to Validea.com. "Trendy, hot stocks didn't garner his attention; he was concerned with companies' balance sheets and their fundamentals."

Central to his approach was the idea of "margin of safety." His goal was to buy stocks at a discount to their intrinsic value so that the risk of loss was limited.

The screen

We used the Graham Value Investor screen developed by Validea.com. (Globe Investor has a joint venture with Validea.ca, a premium Canadian stock screen service.) The screen looks for companies with the following attributes:

Current assets must be at least double current liabilities and long-term debt must not exceed net current assets (current assets minus current liabilities);

Earnings per share must have grown by at least 30 per cent over the past 10 years (we're referring here to total earnings growth, not an annual average);

The company must not have posted a loss in any of the past five years;

The current price/earnings ratio and the P/E based on average earnings of the past three years must be 15 or less;

The price-to-book ratio multiplied by the P/E must be less than 22.

For our virtual portfolio, we "invested" $10,000 (U.S.) in each stock.

The results

From its inception on April 13, 2010, through June 21, 2011, the portfolio is up 14.8 per cent in U.S. dollars (excluding dividends), led by a 71.2-per-cent surge in shares of National Oilwell Varco. The S&P 500 rose 8.2 per cent over the same period.

Remember that a stock screen is a blunt tool for identifying potentially attractive securities. Use it as a starting point for further research, not as the last word on what stocks to buy.

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