Is A Benjamin Graham Inflection Point On The Way?

Published in Investing on 22 June 2012

For bargain hunters, the signs are looking promising.

These are, indeed, difficult times. A few short weeks ago, the FTSE 100 (UKX) was up at 5,965, with talk of 6,000 and beyond colouring our thoughts.

And now, we're hovering around 5,500, having dipped below 5,300 on several occasions. The heady confidence of early spring, in short, seems like another world. What's happened?

The mood has changed, principally. It's clear that global demand has weakened significantly, and that the eurozone's travails are deeper than previously thought. Here at home, you've only got to look at the latest inflation figures. Further afield, markets tanked yesterday on news of weak manufacturing data from in China, the United States and the eurozone.

More gloom to come?

Of course, some will say: 'I told you so'. As I wrote in December, for instance, Deutsche Bank were saying as far back as last September that there could be three more recessions in the next decade -- with the first hitting us around now.

I don't have to tell you that the UK is now in a technical recession, Europe is in a deeper one, and economic activity is slowing down sharply in China and the United States.

Throw in Moody's downgrading of 15 major global banks -- including Royal Bank of Scotland (LSE: RBS), HSBC (LSE: HSBA) and Barclays (LSE: BARC) -- and the mood music is sounding decidedly more downbeat than back in April.

Don't panic, Mr Mainwaring!

At times like these, I'm minded to ask myself what Ben Graham would be doing. Or Warren Buffett. Or Sir John Templeton -- all three of them being renowned value investors with a track record of capitalising on uncertain times to grab juicy bargains.

In short, around the corner could be just the time to pick up some of those juicy bargains -- decent businesses with share prices driven down by adverse sentiment.

Buffett in particular, for instance, is well known for making big contrarian calls -- perhaps because the examples of him doing so are the most recent. At the height of the credit crunch, for example, he locked in some remarkable deals with America's General Electric (NYSE: GE.US) and Goldman Sachs (NYSE: GS.US).

Don't go with the pack

Take the views of Sir John Templeton, who died in 2008. "If you buy the same securities that everyone else is buying, you will have the same results as everyone else."

Instead, he urged: "Heed the words of the great pioneer of stock analysis, Benjamin Graham: 'Buy when most people -- including experts -- are pessimistic, and sell when they are actively optimistic.'."

These days, the words of Buffett -- himself a former student at Benjamin Graham's investing classes, don't forget -- are more widely quoted, but amount to exactly the same thing: "Be fearful when others are greedy, and be greedy when others are fearful."

So what would Graham be buying?

In short, he'd be running the rule over some stocks, searching for juicy-looking bargains. For, as Buffett has famously pointed out, shares are a uniquely perverse commodity: people cheer when they go up in price, and mourn when they become cheaper. For just about everything else, it's the reverse.

Indeed, as I've written before, back when Rolls-Royce (LSE: RR) was plagued by an exploding engine on a Qantas jet, and the doomsters were deserting the shares in drives, I picked up a decent slug of them at 598p. They're now at 846p -- and meanwhile, the FTSE has largely gone nowhere. My only regret: not buying more.

And earlier this month, I picked up some shares in another FTSE 100 blue chip, at a price that it last reached in December 2008. Since then, it's grown its sales, profits and dividends.

Coincidentally, Warren Buffett has been buying exactly the same stock -- and, what's more, doing what I've been doing: buying more, on dips in the share price. Discover its name in this free special report from The Motley Fool: "The One UK Share Warren Buffett Loves". It's free, so what have you got to lose?

Where to look?

Now, when shares are priced in 'screaming buy' territory, investors need strong nerves. And it's a fact that not every investor has the nerve required.

When the FTSE slumped to below 3,500 on 9 March 2009, for instance, plenty of investors stayed on the sidelines for months afterwards -- thereby missing out on the ensuing 50% rise in London's flagship index.

And that's the point: it's not about buying when others are pretending to be fearful, or mildly worried, or idly thinking about selling. It's about buying when people are genuinely rushing for the exit -- or the bathroom -- as fast as they can. And it takes strong nerves and a strong stomach.

Five to follow

So here, without further ado, are five businesses that look to me to be too cheap. They're not classical Benjamin Graham shares on every metric, but then, few companies are. Debt, for instance, precludes many. Nevertheless, if Graham were alive today, I reckon that these five would be among the prospective picks that he'd be running his rule over, watching and waiting.

Not with a view to buying today or even next week, necessarily -- but to do the groundwork in preparation for a buy should the share price become significantly cheaper in the weeks ahead.

CompanyClosing price 21 JuneForecast yieldForecast P/E
Aviva (LSE: AV)278p10.3%4.7
HSBC (LSE: HSBA)559p5.6%8.5
Tesco (LSE: TSCO)310p5.5%8.4
AstraZeneca (LSE: AZN)2778p7.1%7.3
BAE Systems (LSE: BA)290p7.3%6.9

To me, all these companies seem solid businesses with share prices that have been dragged down by the market's general travails.

Indeed, Aviva's yield, at above 10%, seems remarkable. But there's no quibbling with the dividend cover -- of nearly 2 -- and no sign of the meltdown that the doomsayers have been predicting.

Would Benjamin Graham buy them? Sadly, we've no way of finding out: he died in 1976. What I can say, though, is that Graham's student Buffett owns a decent-sized stake in at least one of them.

Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free.

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rober00 22 Jun 2012 , 4:46pm

I am integued Malcolm, I wonder which of the above shares Warren is buying into?

Come to that who is Britains super-investor and what is he buying???

The Fool does tease one so!!!!

goodlifer 22 Jun 2012 , 7:59pm

Hi rober00,

If I remember correctly, you and I once had a bit of a difference of opinion about whether or not investment is sometimes a nonzerosum game.

What puzzled me most was your statement that anyone who didn't realise it's a zerosum game is more or less doomed.

What's the thinking behind this?

If I've got the wrong guy, or misunderstood what you said, please accept my humble apologies.

ukvalueinvestor 24 Jun 2012 , 8:33am

I like the selected blue-chips... probably because I own a slice of each, except HSBC which is my favourite bank at the moment.

Aviva with that 10% yield is amazing. Either a lot of us value types are going to be hailed as contrarian geniuses, or a dividend cut is looming in which case we got it wrong. Only time will tell.

@rober00, It's funny that you mention Britain's 'super investor', because as far as I know, he was going in the exact opposite direction to Buffett on the stock that Malcolm's talking about!

Just shows that nothing is certain, and even the superstars don't agree on everything.

gedinthebox 26 Jun 2012 , 1:25pm

I recently viewed another article, on Motley Fool I think, that noted Aviva's dividend cover as 0.7. Does anyone have any thoughts as to why and which figure is the more "correct"?

dukindiva 26 Jun 2012 , 1:26pm

AZN, AV & TSCO have all been the subject of negative comment recently, AZN because of its 'Patent Cliff', AV because its too UK focused and TSCO because its losing market share.
HSBC is a bank, which are not flavour of the month these days and BAE may be a victim of defense cuts.
Only M&A talk regarding BAE & AZN seems to be be a potential saviour..... so a lot more watching is necessary.

BTW, when are TMF going to stop the tedious ads that spoil the flow of its articles ... does anyone still not know about WB & Tesco.. at least change the record.

backdated 26 Jun 2012 , 1:33pm

Great stuff (that we've all heard every month for the past x years) but should we not be listening also to your sister (site)?

Not a mention of "dividend."

But headline mention of the only thing that has mattered over the centuries "There's one golden rule of investing you should always remember: never invest money you can't afford to lose."

Yeah - I made career out of being advocate for the devil.

And was never popular in the Equity Sales community.

fishy12 26 Jun 2012 , 1:48pm

ou have to be contrarian if you want to make money ,with these shares you can also get paid hefty dividends whilst you wait for that share price to go up. The only trouble is to determine when the price will recover with the eurozone problems and US elections.

Xrat 26 Jun 2012 , 3:25pm

Whilst I smile on your good fortune, I'm pleased to say I bought RR at £5.75.., not sure the sale had gone through I tried again and doubled up at £5.76!
Too mean to pay the sales fees I thought 'If they were good enough to buy in the first place might as well keep them.'
Just let me know if you see a downturn in the number of Chinese tourists.

jongleur100 26 Jun 2012 , 4:23pm

Not without caveats, all of these.
HSBC is looking interesting, but its Chinese/Far east exposure - a longterm strength might provide mid-term downside, as well as the eurozone. It might not be quite cheap enough to buy yet.

AV:very exposed to eurozone breakup. Their previous CEO said (shortly before resigning) AV could only run into trouble 'if Spain and Italy default' - with a sardonic shrug as if to say this couldn't possibly happen. But it easily could, now, unless Spain and the other PIIGs vote to agree fiscal and budgetary control by the ECB/ Bundesbank/ Bundestag/ Schaeuble. (Btw, the divi cover is given as 0.7 on Digital look. That looks a tad risky.)
BAE - I personally avoid those companies with a big structural pension deficit.
I hold TSCO, AZN (also RSA, CHG)

jongleur100 26 Jun 2012 , 4:27pm

sorry: ll 2-3 should read "but its Chinese/Far east exposure - a
longterm strength - might provide mid-term downside..."etc

snoekie 26 Jun 2012 , 5:20pm

Malcolm, you mention the FTSE at 3500, however with all the counterfeiting (QE) being done by the BoE, the index has built this in so I doubt that we will see that figure again, unless the Apocalypse strikes.

Into the 4000's, yes, but not just yet.

I have posted elsewhere that Nero (politicians) are fiddling whilst Rome (Europe and USA) are just beginning to burn. I doubt that any action will be taken until such time as there is a wholesale conflagration, they will continue to go on their junkets to the likes of Mexico before they seriously begin to address the problem, without pouring more petrol onto the fire by more counterfeiting (QE)or issuing more junk bonds.

MDW1954 26 Jun 2012 , 6:08pm


Yes, I dived in too soon, and they went lower. But I'm not complaining.

Malcolm (author)

fedupwithbanks 26 Jun 2012 , 6:43pm

"ou have to be contrarian if you want to make money ,with these shares you can also get paid hefty dividends whilst you wait for that share price to go up. The only trouble is to determine when the price will recover with the eurozone problems and US elections."

However sometimes the hefty dividends don't last as you watch the shares fall in value. With some of the drops I've seen, it would take a lifetime to recover the price.

atilliator 29 Jun 2012 , 12:23am

...who is Britains super-investor...

I am.

...and what is he buying???


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