Low PE Portfolio – October 2009 Update

bullOn the first Tuesday of every month, we will screen our database for the 10 companies with the lowest price to earnings ratio (ModernGraham-style) that are suitable for the enterprising investor.  These 10 companies will be placed in a mock portfolio and rebalanced to have a 10% allocation to each company.  The starting value of the portfolio is $100,000.00.  Dividends will be reinvested in the portfolio.

To see the mock portfolio, you can view this google spreadsheet.

This month, the screen resulted in the following companies being targeted:

The following mock transactions were made this month:

  • Received $0.15/share dividend on 400 shares of UNH for $35.10
  • Sold 13 shares of UNH for $337.35, profit of 3.6%.
  • Sold 22 shares of ISH for $729.30, profit of 7.6%.
  • Bought 9 shares of CB for $436.68.
  • Bought 241 shares of PMD for $1,303.81.
  • Bought 4 shares of BHI for $168.28.
  • Bought 9 shares of AEP for $271.98.
  • Sold 146 shares of XOM for $10,463.82, profit of 4.5%.
  • Bought 8 shares of MRK for $247.44.
  • Sold 604 shares of PFE for $10,286.12, profit of 2.9%.
  • Sold 176 shares of ETN for $10,639.20, profit of 6.8%.
  • Bought 331 shares of GRMN for $10,016.06.
  • Bought 657 shares of OLN for $10,032.39.
  • Bought 160 shares of GD for $10,032.00.

During the month of October, the portfolio gained 0.32% overall, versus 0% by the DJIA, and a loss of 1.98% by the S&P 500.

Full Disclosure:  At the time of publication, the author held a position in GRMN.

Photo provided by herval.


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5 responses to “Low PE Portfolio – October 2009 Update”

  1. james Avatar

    if i understand graham correctly, he wouldn’t purchase a new 10 companies each week. that’s a higher turn over than he really proposed, especially if you take his recommendations for sell points into consideration.
    i like the concept for your blog but wonder if your model may need a little adjustment.
    …or maybe i’m being too literal! 😉

  2. Graham Jervis Avatar
    Graham Jervis

    Hi Benjamin,

    when you mentioned low PE i thought a company like MIR with a PE of 0.86 would make the cut. What would make AEP a better investment than MIR?

    AEP’s debt load is fairly hefty at 11 times income, while MIR is only 2 times Income. the free cash flow of AEP has been negative since 2005 while their debt load has been increasing during the same period. During that period they have also been diluting shares.

    MIR’s free cash flow hasnt been that great either, however, they had positive FCF on 06 and 07 and negative 4 million in 08 and now a TTM of 363 million in FCF. they have also been reducing long term debt and also reducing share count.

    Maybe i am missing something with AEP and MIR as to why AEP would be a good bet when it comes to low PE.

    Please help me understand as i am not really a professional in this.

  3. Benjamin Clark Avatar

    James,

    Thanks for the comment. The portfolio is actually constructed as to be rebalanced once a month. Also, it does not purchase 10 completely new companies each month. Instead, it screens for the top ten, sells any that are not in the screen anymore, and replaces them with the new ones.

    It is a little bit of a higher turnover than an investor should probably seek. However, I believe Graham’s real gripe about turnover had to do with transaction costs. As this is a mock portfolio and it doesn’t have transaction costs (indeed a real portfolio can avoid them with some brokerage companies these days), I believe that concern is mitigated.

    Also, Graham was less of a buy and hold preacher than Buffett is. Graham taught that an investor should only be held while it is prudent to do so. Once these companies are not on the top 10 list anymore, it is unreasonable to keep them.

    Hope that helps.

  4. Benjamin Clark Avatar

    Graham,

    There are a couple of reasons why MIR is not on the list and I hope I can clear it up for you. First of all though, let’s remember that I am not a “professional” investor either. Rather, I have some education in the area and a passion for value investing.

    1. This screen is done on the 120 (and growing) companies in the ModernGraham valuation database. Currently MIR is not included.

    2. Even if MIR were included, it likely wouldn’t make the cut as the screen also looks for companies that pass the tests for the enterprising investor. MIR would fail the test due to no dividend payment and a negative net income in the last 5 years.

    3. Also, the PE ratio is based on our version of normalized earnings using a weighted average over the last 5 years. As a result, MIR’s probably has a higher PE due to lower net incomes in previous years.

  5. Graham Jervis Avatar
    Graham Jervis

    Thanks for the enlightenment Ben.

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