Monday , 22 January 2018

“Graham Stocks” Dramatically Outperform the S&P 500 – Why Invest Any Other Way?

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My portfolio version of Benjamin Graham’s time- tested strategy for defensiveinvesting hold buy sell investors has has only trailed the markets in 3 of the last 12 years and has dramatically outperformed the S&P 500 during that period realizing a 19% (annualized) return vs. only 2% (annualized) for the S&P 500. Let’s take a look at the method and this year’s group of Graham stocks. Words: 790

So writes Norman Rothery ( in edited excerpts from his original article entitled 6 Graham Stocks for 2013.

This article is presented compliments of (A site for sore eyes and inquisitive minds) and (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Rothery goes on to say in further edited excerpts:

You can see the full performance record for my take on Graham’s strategy in the accompanying table. I’m happy to report that it has outperformed the S&P500 (as represented by the SPY exchange-traded fund) in 9 of the last 12 years and often by a large margin.

Performance of past Graham stocks





2000 – 2001




2001 – 2002




2002 – 2003




2003 – 2004




2004 – 2005




2005 – 2006




2006 – 2007




2007 – 2008




2008 – 2009




2009 – 2010




2010 – 2011




2011 – 2012







If you had bought equal dollar amounts of the Graham stocks and replaced them with the new crop of stocks each year, you would have gained 681% (19% annualized) over the full period. On the other hand, the unfortunate index investor who bought and held the S&P500 ETF (NYSE:SPY) would be up only 28% (2% annualized) over the same period. (These results are in U.S. dollars, do not include taxes, but do include dividends reinvested each year when the new stocks are selected.) As you might imagine, I’m very pleased with the returns so far.

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You can read all about Graham’s original method for defensive investors in his book The Intelligent Investor. While he passed away in 1976, an updated edition of The Intelligent Investor (ISBN 0060555661), with modern commentary from veteran columnist Jason Zweig, was published in 2003 and it is definitely worth picking up. I hasten to add that serious Graham buffs should also get a copy of the sixth edition of Security Analysis (ISBN 0071592539) which includes additional commentary from some of today’s most famous value investors. Just be warned, it’s a thick volume that can be daunting.

The Graham Rules

Graham’s original rules for defensive investors were very strict. So strict that you’d have been hard pressed to find any North American stocks with it for much of the last decade. As a result, I took a slightly more lenient approach. The factors I look for are shown in the accompanying list.

Graham-inspired rules

  • P/E Ratio less than 15
  • P/Book Ratio less than 1.5
  • Positive Book Value
  • Current Ratio more than 2
  • Annual EPS Growth (5 Yr Avg) more than 3%
  • Positive 5 Year Dividend Growth
  • Positive Annual Earnings for 5 Years
  • 1 Year Revenue more than $400 Million

To highlight one way that I differ from Graham, consider the dividend test. I require some dividend growth over the last five years whereas Graham demanded a twenty-year record of uninterrupted dividend payments. However, there are very few firms with good 20-year dividend records and requiring them narrows the universe of stocks under consideration dramatically.

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Despite the different rules, very few U.S. stocks usually pass my version of Graham’s test. The annual list peaked at ten stocks in 2002 and quickly bottomed out at two stocks in 2003. (As an aside, I track the list more frequently and found over forty stocks that passed the test when the market hit its lows in the spring of 2009.) This year, the list slipped down to six stocks as the U.S. markets moved higher.

U.S. stocks that pass tests inspired by Benjamin Graham

Company Name




Annual EPS Growth

Current Ratio

Debt to Equity

Revenue ($M)

5-Yr Dividend Growth

BlackRock (BLK)









Corning (GLW)









Fred’s (FRED)









HollyFrontier (HFC)









Universal (UVV)









Weis markets(WMK)









Sources:,,, October 3, 2012

I hasten to add that a well-diversified portfolio should hold more than 10 stocks and in most cases much more. As a result, Graham’s list should be supplemented with other stocks to avoid under-diversification.

You can review the current crop of Graham stocks in the accompanying table but before buying any of them, be sure to examine each stock in great detail. After all, the method is based entirely on the numbers and less tangible aspects of each company are also worth considering. Look for issues that might not be reflected in a company’s latest numbers and get up to speed by reading news stories, press releases, and regulatory filings.

Take your time to get comfortable with Graham’s defensive method, and value investing more generally, before starting out. It might look easy, but it can be harder than you might expect to hold on as value stocks go through their ups and downs.

While Graham’s defensive method has avoided serious trouble so far, it can’t be expected to outperform all of the time. After all, it has trailed the markets in three of the last twelve years so don’t get lured into it based on past performance alone.

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

* (Norman Rothery, PhD, CFA, Founder of StingyInvestor. com, Toronto, ON (416) 243-9580, rothery@stingyinvestor. com,; Click Here to subscribe to Canadian MoneySaver Magazine for $24.95(+tx)per year.)


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