Stingy Investor Contact - Subscribe - Login
  Home | Articles | Screens | Links | SNW | Rothery Report
8 Graham Stocks for 2010

Graham's time-tested strategy for defensive investors beat the market again this year. But that shouldn't come as a big surprise because it's bested the market, often by a wide margin, in eight of the last nine years.

You can check out the yearly performance of the Graham stocks, the S&P500 (as tracked by the SPY exchange-traded fund), and the percentage point difference between the two in Table 1. If you had bought equal dollar amounts of each year's Graham stocks in your RRSP and then replaced them with the new crop of stocks in each subsequent year, you would have gained 480% (or 22% annually) over the full period. On the other hand, the unfortunate index investor who bought and held the S&P500 ETF (NYSE:SPY) would have lost 11% over the same time. That even includes quarterly dividends reinvested annually. As you might imagine, I've been very pleased with the performance of my take on Graham's defensive strategy.

YearGraham S&P500 +/-
2000 - 2001 20.4% -22.2% 42.6
2001 - 2002 28.2% -15.1% 43.3
2002 - 2003 56.8% 16.5% 40.3
2003 - 2004 32.2% 9.4% 22.8
2004 - 2005 46.6% 12.8% 33.8
2005 - 2006 -3.8% 10.7% -14.5
2006 - 2007 34.4% 16.1% 18.3
2007 - 2008 -6.5% -22.1% 15.6
2008 - 2009 2.2% -6.2% 8.4
Total Gain 479.5% -10.8%490.3
Annualized 22.0% -1.3%23.3

Graham first described his method for defensive investors in The Intelligent Investor. Graham, the dean of value investing, passed away in 1976 but an updated edition of The Intelligent Investor (ISBN 0060555661), with new commentary from veteran columnist Jason Zweig, was published in 2003. The original text is presented in its entirety and Zweig's commentary is thoughtfully separated into copious footnotes at the end of each chapter. If you don't already have a copy of The Intelligent Investor then this is the version to get. Serious Graham buffs will also want to check out the sixth edition of Security Analysis (ISBN 0071592539) which includes commentary from some of today's famous value investors. But, clocking in at 700 pages, it's not for dilettantes.

Because Graham's rules for defensive investors are extraordinarily strict, I use a more moderate version. My Graham-inspired rules are shown in Table 2. For example, I require some dividend growth over the last five years whereas Graham demanded a twenty-year record of uninterrupted dividend payments. Similarly, I focus on five years worth of earnings growth instead of ten years largely because the five-year figures are provided by many free internet stock screeners.

1. P/E Ratio less than 15
2. P/Book Ratio less than 1.5
3. Book Value more than 0.01
4. Current Ratio more than 2
5. Annual EPS Growth (5-Yr Avg) more than 3%
6. 5-Year Dividend Growth more than 0%
7. 5-Year P/E Low more than 0.01
8. 1-Year Revenue more than $400 Million

Even with my less-stringent version of Graham's rules, very few U.S. stocks usually pass the test. Indeed, the list peaked at 10 stocks in 2002, bottomed out at 2 stocks in 2003, and contained only 4 candidates last year. This year, the list is back up near its highs and contains 8 stocks. While that's a relatively high number of stocks, the list is tiny compared to the thousands of stocks which trade each day. As a result, even my version of Graham's approach remains quite strict.

The current crop of Graham stocks is shown in Table 3. Before diving in, you should always examine any stock in great detail and remember that ten stocks can not be said to form a well-diversified portfolio. Do your own due diligence and be on the look out for problems that might not be reflected in a company's latest numbers. Study news stories, press releases, and regulatory filings.

If you'd like more information on Graham stocks, I publish the Graham Value Stocks letter which covers several Graham-inspired strategies and highlights value stocks in both the U.S. and Canada. Just send me an email, and I'll be happy to provide an online sample.

Remember that value stocks can be psychologically difficult to hold and some stocks will disappoint. While Graham's Defensive method has avoided running into any serious trouble so far, it can't be expected to outperform all of the time. Indeed, significant periods of underperformance are likely. I'm particularly concerned that you might dive right in based on past performance alone. Don't. Be sure to focus at least as much on what can go wrong as on what might go right.

Table 3: U.S. stocks that pass Graham-inspired rules
CompanyPriceP/EP/BEPS GrowthCurrent RatioD/ERevenue ($M)Dividend Growth
A.D.M. (ADM)$29.7211.21.4128.1%2.20.6169,20714.9%
Baldor (BEZ)$28.5514.91.4732.0%2.71.361,7675.1%
Cash America (CSH)$31.8312.71.4929.8%5.10.691,05216.6%
Overseas Shipholding (OSG)$41.335.90.5921.2%4.10.721,47318.2%
Reliance Steel (RS)$41.9713.41.2670.0%3.50.527,51727.2%
Skywest (SKYW) $17.1611.70.7311.1%3.01.393,04910.2%
Spartan Motors (SPAR)$5.476.10.9957.3%2.80.156242.4%
Tidewater (TDW)$,37710.8%
Source:, October 8, 2009

Additional Resources:

First published in the November/December 2009 edition of the Canadian MoneySaver.

Globe & Mail Articles
 Extreme yields
 The easy way
 Smaller stable dividend
 The 250 | Megastars
 Champagne portfolio
 Screaming Value
 Blended momentum
 Dividend monster
 Frugal dividend
 Stable dividend
 Speads and recessions
 TSX 60 for value investors
 Looking at 10-year returns
 Watching for a bottom
 Oh, bother!
 Indexing advice
 Media-shy stocks
 Curse of size
 Market uncertainty
 Be even lazier
 Scary beats safe
 Small, illiquid, value
 Use the numbers
 What value is good value?
 Sculpt for value
 Value vs CAPE
 Graham Rules
 CAPE vs PeakE
 Top value ratio
 Low Beta
 Value and dividends
 Walter Schloss
 Try unloved AIG
 Why I'm a value investor
 New world of ETFs
 Low P/Es possible
 10 yielders
 Be happier
 Dividend Downside
 Shiller's P/E
 Copycat investing
 Cashing in on class
 Index roulette
 Theory collides
 Diving too deep
 3 retirement villains
 Scourge of inflation
 Economic omens
 Analyst Expectations
 Value stock scarcity
 It's all in the index
 How to pick good funds
 Low Beta Wins
 Hunt for dividend stocks
 Think garage sale

MoneySaver Articles
 2 Graham Stocks for 2018
 2 Stingy Stocks for 2017
 2 Graham Stocks for 2017
 3 Stingy Stocks for 2016
 5 Graham Stocks for 2016
 3 Stingy Stocks for 2015
 3 Graham Stocks for 2015
 3 Stingy Stocks for 2014
 4 Graham Stocks for 2014
 8 Stingy Stocks for 2013
 6 Graham Stocks for 2013
 9 Stingy Stocks for 2012
 8 Graham Stocks for 2012
 Simple Way 2011
 5 Stingy Stocks for 2011
 7 Graham Stocks for 2011
 Simple Way 2010
 5 Stingy Stocks for 2010
 8 Graham Stocks for 2010
 Simple Way 2009
 Timing Temptation
 19 Stingy Stocks for 2009
 4 Graham Stocks for 2009
 Simple Way 2008
 Active at Passive Prices
 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
 5 Graham Stocks for 2008
 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
 8 Graham Stocks for 2007
 Top SPPs
 The Simple Way
 A hole in your IPO?
 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
 Are Dividends Safe?
 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
 High Performance Graham
 Intelligent Indexing
 Unbundling Canadian ETFs
 A history of yield
 A Dynamic Duo
 Canadian Graham Stock
 Dividends at Risk
 Thrifty Value Stocks
 Stocks in Short Supply
 The New Dividend
 Hunting Goodwill
 SPPs for 2003
 RRSP: don't panic
 Desirable Dividends
 Stingy Selections 2003
 10 Graham Picks
 Growth Eh?
 Timing Disaster
 Dangerous Diversification
 The Coffee Can Portfolio
 Down with the dogs
 Stingy Selections
 Frugal Funds
 Graham Revisited
 Just Spend It
 Ticker Temptation
 Stock Mortality
 Focus on Fees
 SPPs for the Long Term
 Seeking Solid Stocks
 Relative Strength
 The VR Approach
 The Irrational Investor
 Value Investing

Old MS Articles
 Cdn Top 200 2018
 Cdn Top 200 2017
 Cdn Top 200 2016
 Cdn Top 200 2015
 Cdn Top 200 2014
 Cdn Top 200 2013
 Cdn Top 200 2012
 Cdn Top 200 2011
 Cdn Top 200 2010
 Cdn Top 200 2009
 Cdn Top 200 2008
 Cdn Top 200 2007
 Cdn Top 200 2006
 Cdn Top 200 2005
 US Top 500 2018
 US Top 500 2017
 US Top 500 2016
 US Top 500 2015
 US Top 500 2014
 US Top 500 2013
 US Top 500 2012
 US Top 500 2011
 US Top 500 2010
 US Top 500 2009
 US Top 500 2008
 US Top 500 2007
 US Top 1000 2006
 Dividends 100 2017
 Dividends 100 2016
 Retirement 100 2015
 Retirement 100 2014
 Retirement 100 2013
 Retirement 100 2012
 Retirement 100 2011
 Retirement 100 2010
 Income 100 2009
 Income 100 2008
 Income 100 2007
 Top Trusts 2006
 Top Trusts 2005
 Hot Potato
 Buffett Buys
 Stocks that pay
 Value in the S&P500
 Where to invest $100k
 Where to invest $10k
 Summer Simple Way
 A crystal ball for stocks?
 Cheap & safe
 Risky business
 Dividend investing
 Value investing
 Momentum investing
 Low P/E P/B
 Dividend growers
 Graham's prescription
 The case for optimism
 Wicked investments
 Simply spectacular
 Small stocks, big profits
 Value that sizzles
 So simple it works
 No assembly required
 Investing by the book
 Invest like the masters
 A simple way to get rich
 Stocks for cannibals
 Car bites dogs
 So easy, so profitable
 Dogs of the Dow
 Money for nothing
 Yield of dreams
 Return of the master

Advisor's Edge Articles
 Passive Rebundling
 Doing the math

Norm Speaks
Flip Books

 Asset Mixer
 Periodic Table

About Us | Legal | Contact Us
Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...