Benjamin Graham Formula
When choosing stocks, the following formula was used to initially screen companies. The intrinsic value was calculated, and then compared with the last price of the stock. Companies were ranked according to their intrinsic value to last price ratio, where intrinsic value was calculated as:
Intrinsic Value = (EPS x (8.5 + 2G) x 4.4) / Y
Where:
- EPS = the company's earnings per share over the last 12 months
- 8.5 = the value Benjamin Graham proposed as the price to earnings ratio for a zero growth company
- G = the company's five year growth rate
- 4.4 = the average yield of AAA rated corporate bonds back in 1962, when the model was initially developed
- Y = the current yield of AAA corporate bonds
In the above example, the value of Y was based on the 20-year composite AAA yield of 2.25%
Earnings per Share
Another important measure of a company's financial strength is their earnings per share. This measure tells the investor how much money a company earned in a given time period, stated in terms of each share of common stock issued. Industry analysts often project earnings per share into the future. This projection is based on guidance they receive from the company they're analyzing. The future earnings of a company are the key to deriving an estimate of a stock's future price.
Excellent Stocks
The last screen involves choosing excellent stocks. This eliminates from consideration companies that sell commodity-type products. It's important to find companies that command a price premium in the marketplace because they have either strong brand recognition and / or loyal customers.
Five Good Stocks
The above stock screening resulted in roughly 370 candidate companies from a universe of around 2,000 stocks. The five good stocks to buy in 2013 were selected because of their strong financial performance and widespread brand recognition.
Five Good Stocks to Buy in 2013
| Ticker | Company | Industry |
| INTC | Intel Corporation | Semiconductor - Broad Line |
| STX | Seagate Technology PLC | Data Storage Devices |
| WU | The Western Union Company | Business Services |
| TRW | TRW Automotive Holdings Corp. | Auto Parts |
| YHOO | Yahoo! Inc. | Internet Information Providers |
Rationale for Stock Picks
All of the above stocks satisfied the requirements of the process, and show strength in the following three areas:
- Excellent Companies: these companies have strong brand recognition, and none sell commodity-type products.
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