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What the Romans taught us about shoring up portfolios

Norman Rothery is the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

It's rare to find ancient structures that have stood the test of time. But those that survive hold lessons for the modern world.

One of those lessons was recently learned by researchers at the Lawrence Berkeley National Laboratory who cracked the puzzle behind Roman concrete. When used to build ports, the ancient stuff significantly outlasts the common version, which can handle only a few decades in the waves.

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It turns out that the secret is to add volcanic rock, and a little less lime, to the mix. It's a rediscovery that should allow future ports to better fend off storms.

It's similarly wise to learn from those who've come before us when looking for stocks that might stand the test of time.

As a value investor I like to turn to Benjamin Graham who was a great teacher and money manager. He formulated a method for defensive investors in his book The Intelligent Investor. I've used it, with a little tweaking, to achieve very pleasing results for many years.

Mr. Graham thought the safety of an investment was closely related to its price. Generally speaking, lower prices provide larger margins of safety. For defensive investors he suggested looking for stocks that trade at less than 15 times earnings and less than 1.5 times book value.

He also wanted firms to be reasonably large. To reflect the passage of time, and a little intervening inflation, I think firms with at least $400-million in annual revenues fit the bill.

When it comes to debt, I stick with his desire for companies with current ratios (current assets dividend by current liabilities) of two or more.

Mr. Graham also believed that long-term earnings growth and a good record of dividend payments were important. For these measures, I look for average earnings-per-share growth over the past five years of more than 3 per cent and at least some dividend growth over the same time frame.

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These might sound like modest requirements, but there aren't any Canadian stocks that currently meet them.

Even in the U.S. only a handful of stocks typically pass the test. The five that currently pass muster, according to S&P Capital IQ, are American Financial Group Inc. (AFG), HollyFrontier Corp. (HFC), Universal Corp. (UVV), Unum Group (UNM), and Weis Markets Inc.(WMK).

As it happens, one of the stocks is new to the list. It arrived after a little recent price weakness that pushed its price-to-book-value ratio below 1.5. Its low price-to-earnings ratio of only five really piqued my interest.

The company in question is HollyFrontier of Dallas. It is the product of a merger between Holly and Frontier Oil in 2011, which created one of the largest independent petroleum refiners in the United States.

Dividend investors should take note. It pays a regular quarterly dividend of $0.30 (U.S.) per share, which, based on recent prices, puts its yield at 2.7 per cent. But that doesn't include a slew of special dividends. Shareholders picked up an extra $2.50 per share over the past year. If you combine the two, HollyFrontier's yield gushes up to 8.3 per cent.

Mind you, the special dividends will likely dry up in bad times and analysts expect the firm's earnings to slip a bit over the next couple of years. Its forward P/E ratio, based on estimated earnings over the next year, comes in at eight. But even these lower earnings still leave room for the special dividends to continue.

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On a cautionary note, I like to wait a bit after a company first appears on the defensive screen before buying in. It's a seasoning process that is designed to make sure the firm is built out of reasonably solid materials and doesn't have a hidden structural flaw.

Nonetheless, HollyFrontier deserves a second look by defensive investors. With a bit of good fortune, it'll be shoring up portfolios for some time to come. It might not be quite as solid as Roman concrete, but not much in this world is.

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About the Author

Norman Rothery, Ph.D., CFA, is the founder of and has been catering to value investors since 1995. He publishes the Rothery Report, a value stock newsletter. Norm obtained a Ph.D. in atomic physics from York University before following his passion for investing. More


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