In Brief

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.

Background

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…

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