Whether the market’s going up or going down, Ben Graham's value investing strategy seems to work very well, says Roy Ward of Cabot Benjamin Graham Value Letter.
Steven Halpern: We’re here today with Roy Ward, editor of Cabot Benjamin Graham Value Letter. Thanks for taking the time to talk today.
Roy Ward: You’re welcome, Steve.
Steven Halpern: All of our listeners are familiar with Warren Buffett, but many may not know that Buffett was a student of Ben Graham, who has been called the father of value investing. Could you tell us a little about Graham and his value philosophy?
Roy Ward: Yes. Benjamin Graham was born in 1894, which is a long time ago, so his analyses and methodologies date back to the 20s and 30s, and 40s, but they still work today.
Ben Graham, among other things, taught finance and investments at Columbia University, where Warren Buffett was a student. They got to know each other there, and Warren Buffett began working for Benjamin Graham a few years later.
Ben Graham’s most well-known book is The Intelligent Investor, which is an easy read, really. In it, you can understand not only his philosophy but also all the formulas he uses to find undervalued stocks.
Steven Halpern: Now, have you found that over the years that Graham’s criteria for selecting value stock has remained the same or are there things you had to do to update his strategy for the current market?
Roy Ward: I’ve kept it the same. Whether the market’s going up or going down, it seems to work very well. The stocks that come up as bargains using his criteria do quite well in up markets or down markets, and current markets or past markets.
Steven Halpern: I’ve seen your latest newsletter that you called Xerox (XRX) a bargain. What makes the stock attractive?
Roy Ward: Going by the numbers initially, it’s got a PE of 9.3, which is a current PE and I’ve priced the book value right around 1. Those are both bargain ratios, also yields of 2.4%.
In addition, it has a low price to cash flow ratio of only 4.2 times, and that’s really low. Looking at the numbers, it’s a real bargain. In addition, it’s a good, quality company. It has a strong balance sheet. Also, looking forward, it looks like sales and earnings are in transition period this year, but it looks like growth will ramp up in 2014 and beyond.
Steven Halpern: Also, you’ve been looking at Walgreens Company (WAG) that’s been around for over 100 years, and you’ve noted the sales and earnings recently were disappointing, but that hasn’t kept you from being bullish on the stock long-term. Could you tell us your outlook for Walgreens?
Roy Ward: Yes. They lost quite a bit of business to CVS last year. Walgreens’ contract with Express Scripts was allowed to lapse for nine months during 2012 and, during that time, CVS picked up a lot of business that was formerly Walgreens’.
Walgreens is beginning to get that business back, and actually they’re getting more business than they originally thought. They thought they would lose quite a bit of that business permanently, but it’s coming back faster than they thought.
In addition, they’ve inked a deal with Alliance Boots of England and acquired a 45% stake in that company, and that’s an international pharmaceutical business that’s mostly in wholesale.
That should boost Walgreens’ sales and earnings quite a bit and Walgreens should wind up with quite a bit higher growth rate going forward.
During the year this year, I think, again, Walgreens is in kind of a transition area, but next year things should start to pick up and Walgreens should get back to a more normal growth rate.
Steven Halpern: Well great. We really appreciate you taking the time to speak with us and particularly sharing some of your current stock picks. Thank you.
Roy Ward: You’re welcome. Glad to do it, Steve.
