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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
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
Eye on PI
MoneySense Articles
Dividend investing
Dividend growers
Cdn Top 200 2010
US Top 500 2010
Graham's prescription
Income 100: 2009
The case for optimism
Cdn Top 200 2009
U.S. Top 200 2009
Wicked investments
Simply spectacular
Income 2008
Small stocks, big profits
Cdn Top 200 2008
US Top 500 2008
Value that sizzles
So simple it works
Income 100
No assembly required
Investing by the book
Cdn Top 200 2007
US Top 500 2007
Invest like the masters
A simple way to get rich
Top Trusts 2006
Stocks for cannibals
Car bites dogs
Cdn Top 200 2006
US Top 1000 2006
So easy, so profitable
Top Trusts 2005
Dogs of the Dow
Top 200 2005
Money for nothing
Yield of dreams
Return of the master
Advisor's Edge Articles
Passive Rebundling
Doing the math
Norm Speaks
Flip Books
In good markets and bad, I look for two qualities when hunting for bargain stocks. I want them to be cheap and relatively safe. Not surprisingly, the combination can be difficult to achieve.
When composing my annual Stingy Stock list for the Canadian MoneySaver I select stocks with price-to-sales ratios of less than one. In the past few years, relatively few stocks passed this test of frugality. Due to the recent bear market more stocks made the cut this year.
Cheap stocks are great but I also want some assurance that they won't go bust. Because large firms tend to be more stable than smaller firms, I stick to stocks in the S&P 500. This is no guarantee of longevity. Indeed, several big S&P500 stocks failed this year and others were rescued by government bailouts but that didn't help shareholders much.
Because size is an insufficient measure of safety, I also look for companies with little debt and lots of assets. These firms are much stronger than levered firms living on the edge. Three ratios are very useful when searching for companies with little debt. Perhaps the most important is the debt-to-equity ratio which is calculated by dividing a company's long-term debt by shareholder's equity. The amount of debt that a company can comfortably support varies from industry to industry but debt-to-equity ratios of more than one are often too high. I prefer very conservative companies with even less debt and look for debt-to-equity ratios of 0.5 or less.
Next up is the current ratio which is calculated by dividing a company's current assets by its current liabilities. Current assets are assets, such as receivables and inventory, that can be turned into cash within the next year. Current liabilities are payments that the company must make within the next year. Naturally, an investor would like a company's current assets to be much more than its current liabilities and I prefer companies with current assets at least twice as large as current liabilities. After all, you can be pretty sure that a firm's creditors will demand prompt payment of the current liabilities. On the other hand, some current assets, such as inventory, might not actually be worth as much as management expects. Just think about the big Boxing Day sales retailers have to hold to liquidate excess inventory at the end of the holiday season.
Finally, a company's earnings before interest and taxes should be large in comparison to its interest payments. The ratio of earnings before interest and taxes to interest payments is called interest coverage and I like this ratio to be two or more. But it is important to remember that debt-free companies do not have to make interest payments and don't have an interest coverage figure. Nonetheless, debt-free firms should not be excluded from consideration.
While the debt ratios I've selected are very useful in determining a firm's ability to shoulder debt, they are not perfect. For instance, some long-term obligations may not be fully reflected on a company's balance sheet and are, sensibly enough, called off-balance sheet debt. Regrettably, off-balance sheet debt is often ignored but it can be a source of considerable consternation. Things like unexpected legal liabilities can sideswipe what might otherwise be a good investment. As with all screening techniques, be sure to embark on a more detailed investigation of each stock before making a final investment decision.
Continuing the safety theme, I also want a company to show some earnings and cash flow from operations over the last year. After all, it is less likely that a business will go under when it is profitable and has cash coming in the door.
All of my criteria are summarized in Table 1. I've used these rules to find interesting value stocks over the last seven years with some success as shown in Table 2. Unfortunately, last year was disappointing and the Stingy Stocks slipped 40.1%. They also trailed the S&P 500's loss of 37.5%.
| Table 1: Stingy Stock Criteria |
| 1. A member of the S&P500 2. Debt-to-Equity Ratio less than or equal to 0.5 3. Current Ratio of more than 2 4. Interest Coverage of more than 2 5. Some Cash Flow from Operations 6. Some Earnings 7. Price to Sales ratio of less than 1 |
| Table 2: Past Performance | |||
| Period* | Stingy Stocks | S&P500 (SPY) | +/- |
| 2001 - 2002 | -1.9% | -22.1% | 20.2 |
| 2002 - 2003 | 33.8% | 23.0% | 10.8 |
| 2003 - 2004 | 29.8% | 13.4% | 16.4 |
| 2004 - 2005 | 29.2% | 8.2% | 21.0 |
| 2005 - 2006 | 28.9% | 12.6% | 16.3 |
| 2006 - 2007 | -5.5% | 7.4% | -12.9 |
| 2007 - 2008 | -40.1% | -37.5% | -2.6 |
| Total Gain Since Inception | 60.4% | -11.2% | 71.7 |
| Source: quote.yahoo.com * Indicates the time between articles and not calendar years. | |||
Even with a big down year, the Stingy Stocks have yielded a total gain of 60.4% since 2001. That's assuming the old stocks were sold and the new stocks were purchased each year. In comparison, the S&P500 (as represented by the SPY exchange-traded fund) lagged by 71.7 percentage points over the same period and posted an overall loss of 11.2%.
The Stingy method found only 5 stocks last year but the bear market presents us with a buffet of 19 stocks this year. The complete list is shown in Table 3. The only two stocks to make the list two years running are Genuine Parts (GPC), and Robert Half (RHI).
I hope that I've piqued your interest, but be sure to fully investigate each stock, and talk to your investment advisor, before investing. Remember, although the Stingy Stocks are relatively safe, I think this market has made it abundantly clear that there is no such thing as a risk-free stock.
| Table 3: Stingy Selections for 2009 | ||||||||
| Company | Price | P/S | D/E | C.R. | I.C. | P/CF | P/E | Yield |
| AK Steel (AKS) | $7.88 | 0.11 | 0.46 | 2.2 | 19 | 1.2 | 1.6 | 2.5% |
| Allegheny (ATI) | $22.95 | 0.40 | 0.22 | 2.7 | 1547 | 3.1 | 3.9 | 3.1% |
| Baker Hughes (BHI) | $34.83 | 0.94 | 0.24 | 2.7 | 68 | 4.8 | 6.8 | 1.7% |
| Bed Bath & Beyond (BBBY) | $20.29 | 0.73 | 0.00 | 2.2 | - | 7.8 | 10.5 | 0.0% |
| CF Industries (CF) | $52.63 | 0.81 | 0.00 | 2.1 | 19 | 4.2 | 4.8 | 0.8% |
| Cintas Corp (CTAS) | $24.02 | 0.92 | 0.41 | 3.7 | 12 | 6.9 | 11.1 | 1.9% |
| Cooper Ind (CBE) | $24.14 | 0.75 | 0.42 | 2.0 | 15 | 6.0 | 6.3 | 4.1% |
| Genuine Parts (GPC) | $39.15 | 0.56 | 0.19 | 2.5 | 27 | 10.3 | 12.6 | 4.0% |
| Halliburton (HAL) | $17.60 | 0.90 | 0.37 | 2.9 | 34 | 6.1 | 8.7 | 2.1% |
| Molex Inc (MOLX) | $13.60 | 0.71 | 0.10 | 2.1 | - | 5.2 | 11.8 | 4.5% |
| Nucor (NUE) | $35.68 | 0.47 | 0.40 | 2.4 | 9 | 4.3 | 5.2 | 3.6% |
| Polo Ralph Lauren (RL) | $43.20 | 0.84 | 0.17 | 2.5 | 102 | 6.3 | 9.4 | 0.5% |
| Robert Half (RHI) | $20.89 | 0.67 | 0.00 | 2.4 | - | 8.9 | 11.2 | 2.1% |
| Rowan Comp (RDC) | $17.35 | 0.88 | 0.16 | 2.3 | 43 | 3.2 | 4.2 | 2.3% |
| Teradyne (TER) | $3.79 | 0.55 | 0.00 | 2.8 | - | 6.9 | 103.0 | 0.0% |
| Tiffany (TIF) | $19.79 | 0.80 | 0.50 | 2.5 | 22 | 5.3 | 8.3 | 3.4% |
| VF Corp (VFC) | $52.29 | 0.75 | 0.40 | 2.2 | 11 | 7.3 | 9.0 | 4.5% |
| Watson Pharm. (WPI) | $23.75 | 0.99 | 0.40 | 3.3 | 1316 | 6.0 | 12.3 | 0.0% |
| WW Grainger (GWW) | $70.57 | 0.78 | 0.25 | 3.0 | 462 | 8.7 | 11.9 | 2.3% |
| Source: www.stingyinvestor.com, www.msn.com, November 28, 2008* | ||||||||
First published in the January 2009 edition of the Canadian MoneySaver.
* Typo Correction: The 2009 list was based on closing prices from October 28, 2009 and not October 27, 2009.
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