By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 10/24/11
For this Cabot Wealth Advisory, I combined Warren Buffett's and Benjamin Graham's criteria for choosing stocks. I looked for stocks with:
1) Free cash flow more than $20 million--cash needs include dividends, operating expenses, capital improvements, and research.
2) Net profit margin more than 15%--a good indicator of growth sustainability.
3) Return on equity more than 15%--a barometer of future appreciation.
4) Discounted cash flow value higher than current price--Standard & Poor's is a good source to find discounted cash flow estimates.
5) Market capitalization more than $1 billion--small companies not allowed.
6) Standard & Poor's rating of B+ or better--indicates financial stability and steady growth of earnings and dividends.
7) Positive earnings growth during the past five years with no deficits--very important to adhere to.
8) Dividends currently paid--always important and helps your return, too.
I screened my Benjamin Graham Common Stock Database and found two high-quality companies that fit my criteria. Both companies are leaders in the retail store sector, and both have excellent future prospects.
Ross Stores (ROST) operates 1,091 stores in 27 states and Guam featuring apparel, shoes, jewelry and home furnishings. Ross is able to offer brand-name merchandise at 20% to 60% below department and specialty store prices by buying manufacturers' cancellations and overruns. The company keeps low in-store inventories to increase turnover and to reduce the need for discounts.
Consumers continue to seek Ross's low-priced products during the current economic malaise. The company will enter Arkansas and Illinois with an initial 15 new stores. These will jump-start Ross's presence and provide noticeable growth in the near future. We forecast sales and earnings growth of 12% during the next 12 months. The current dividend is meager but provides a 1.0% yield that will continue to grow.
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J. Royden Ward
Editor of
Cabot Benjamin Graham Value Letter
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of
Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the
Value Letter.