The following companies have passed the requirements of the defensive investor, which include:
1) Adequate size of the enterprise; Market cap greater than $2 billion,
2) Sufficiently strong financial condition; Current Ratio greater than 2,
3) Earnings stability; Positive Net Income for the last 10 years,
4) Dividend record; Dividend payments for the last 10 years,
5) Earnings growth; Increase of one-third in EPS in the past 10 years using 3 year averages at the beginning and end of the period,
6) Moderate Price/Earnings Ratio; PE Ratio less than 20
7) Moderate Price/Assets Ratio; PB Ratio less than 2.5 or multiple of PB and PE less than 50.
*The company must pass at least 6 of the 7 tests in order to be suitable for the defensive investor.
Our requirements for the defensive investor are based on Benjamin Graham's The Intelligent Investor, but have been modernized and updated.
After screening the Russell 3000 for all of the companies that pass the requirements of the defensive investor, we sort them to provide a starting point for research. Here are the results:
15 companies trading at greatest discount to intrinsic value:
| PGR | PROGRESSIVE CORP |
| VLO | VALERO ENERGY CORP |
| NI | NISOURCE INC |
| NFB | NORTH FORK BANCORP |
| STFC | STATE AUTO FINANCIAL |
| ATG | AGL RESOURCES INC |
| ASH | ASHLAND INC |
| BAC | BANK OF AMERICA CORP |
| WFC | WELLS FARGO & CO |
| STZ | CONSTELLATION BRANDS |
| ZION | ZIONS BANCORPORATION |
| MNI | MCCLATCHY COMPANY |
| TMA | THORNBURG MORTGAGE |
| TOA | TECHNICAL OLYMPIC |
| CB | CHUBB CORP (THE) |
15 companies with the lowest PE Ratio (calculated using Our Methods):
| TOA | TECHNICAL OLYMPIC |
| FBP | FIRST BANCORP |
| PGR | PROGRESSIVE CORP |
| SPF | STANDARD PACIFIC |
| BZH | BEAZER HOMES USA INC |
| PHM | PULTE HOMES, INC. |
| HOV | HOVNANIAN ENTERPRISE |
| KBH | KB HOME |
| MTH | MERITAGE HOMES CORP |
| CGI | COMMERCE GROUP, INC. |
| LUK | LEUCADIA NATIONAL |
| WHI | W HOLDING COMPANY |
| MHO | M/I HOMES, INC. |
| AET | AETNA INC |
| MDC | M.D.C. HOLDINGS, INC |
15 companies with the highest Return on Invested Capital (ROIC) using Warren Buffet's definitions of owner earnings and contributed capital:
| RCII | RENT-A-CENTER, INC. |
| DEBS | DEB SHOPS, INC. |
| DLX | DELUXE CORPORATION |
| HRB | H&R BLOCK INC |
| PCU | SOUTHERN COPPER CORP |
| NUE | NUCOR CORPORATION |
| RYL | RYLAND GROUP, INC |
| KCP | COLE (KENNETH) PRODS |
| MDC | M.D.C. HOLDINGS, INC |
| LIFE | LIFELINE SYSTEMS INC |
| LEN | LENNAR CORP |
| EASI | ENGINEERED SUPPORT |
| TTC | TORO COMPANY (THE) |
| EXPO | EXPONENT, INC. |
| LIZ | LIZ CLAIBORNE, INC. |
I can't believe STZ appears in your defensive selections. It is highly levereged and in the most recent quarter earned $68M. Interest expenses came in at $72M and actually exceeded earnings.
Graham recommends avoiding any security with less than 5:1 interest coverage, and STZ is not even close to passing that test.
# Posted by: Chris at January 15, 2007 10:08 AM