A hardcore intrinsic value investing screen based on buying with a significant Margin of Safety but not as demanding as his set of Defensive Screen criteria. Despite the name, this is not a growth screen.
In Benjamin Graham's 1947 work, “The Intelligent Investor,” he describes how his approach would be applied by two different types of investors—those that are “defensive” (i.e. those investors unable to devote much time to the process or inexperienced with investing) and those that are “enterprising” (with greater market experience and more time for portfolio management). Graham felt defensive investors should confine their holdings to the shares of large, prominent/important, and conservatively financed companies with long histories of profitable operations. In contrast, entreprising investors could expand their universe outside of these “important” companies. He suggests looking at i) the relatively unpopular large company, ii) “special situations”, and iii) “bargain issues”. Nevertheles, he reiterates that purchases should be attractively priced as established by intelligent analysis.
“The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades, an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort in the form of a better average return than that realized by the passive investor.”
Calculation / Definition
Graham’s strict investing criteria in the Defensive Screen were somewhat loosened for Enterprising Investors, although they still remained restrictive. Broadly, they were as follows:
- Size: Sales > $500 million ($100m originally, but adjusted for inflation since the time of Graham’s writing). Despite the greater flexibility, he still advises against small, undervalued companies given that they may not be able to sustain themselves through an unstable or adverse market.
- Strong Financial Condition: Current Ratio > 1.5, less than the 2.0 required for his Defensive Screen while Long Term debt < 110% of working Capital.
- Earnings Stability: EPS > 0 for the last 5 Years . Graham also loosened the requirement of earnings stability, specifying that earnings be positive for five rather than ten years.
- Dividend track record: Yield > 0. Graham only specified that firms pay some level of current dividends (rather than 20 years for the Defensive Screen!).
- Earnings growth: This is more relaxed in that Graham wanted to see earnings greater than 5 years ago.
- Price Earnings Ratio in the lower 10% of all stocks. Graham actually set a more restrictive price earnings ratio level for Enterprising Investors.
- Price to Tangible Book < 1.2. Graham recommends that Enterprising Investors should look for stocks with a price per share that is less than or equal to 1.2 times its tangible book assets (price-to-book ratio), again a more restrictive criteria.
Does it Work?
How can I run this Screen?
Watch Out For
One warning that Graham gave was for the low PE filter for cyclical firms with widely fluctuating earnings. These firms often trade at high prices and low PEs in good years when they should be sold, and low prices and high PEs in bad years when they should be considered for purchase. For such firms, Graham recommended using the same price to past average earnings, as suggested for the Defensive Investor screen.
From the Source
Graham first described his method in The Intelligent Investor, of which an updated edition was published in 2003. You may also want to check out Securities Analysis but, at 700 pages long, it's not for the faint-hearted.
- Wikipedia on Benjamin Graham
- AAII on Entreprising Investor Screen
- Modern Graham: 10 Undervalued Companies for the Entreprising Investor
- How To Pick Stocks Like Benjamin Graham – The Enterprising Investor
- Herstocks: Choosing Benjamin Graham - style stocks for enterprising investors