## Contents

### Graham's Stock Grades

### GrahamValue's Assessments

"By far the best book about investing ever written... a sound intellectual framework for making [investment] decisions."

## Graham's Stock Grades

Benjamin Graham recommended *three* categories of stocks, with *seventeen* qualitative and quantitative specifications.

### 1. Defensive

These were the highest quality (and *costliest*) stocks Graham recommended, and were required to have:

1. Not less than $100 million of annual sales.

2-A. Current assets should be at least twice current liabilities.

2-B. Long-term debt should not exceed the net current assets.

3. Some earnings for the common stock in each of the past ten years.

4. Uninterrupted [dividend] payments for at least the past 20 years.

5. A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.

6. Current price should not be more than 15 times average earnings of the past three years.

7. Current price should not be more than 1½ times the book value.

As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5.

Graham allowed for individual exceptions to the above, if the portfolio as a whole cleared all criteria. Graham also noted that *Utilities* were more likely to clear the above; and modified criteria *#1*, *#2-A* and *#2-B* for *Utilities* and *Financials*^{[1]}.

Graham recommended a minimum portfolio size of *10* for *Defensive* grade stocks; or in other words, not more than *10%* of one's portfolio per *Defensive* grade stock^{[2]}.

Note: Criterion *#1* requires adjustment for *Inflation* and defaults to *500 million* on *GrahamValue*^{[3]}.

### 2. Enterprising

For more *Enterprising* (or *aggressive*) investors, Graham recommended stocks *"selling at multipliers under 10"* that also had:

1-A. Current assets at least 1½ times current liabilities.

1-B. Debt not more than 110% of net current assets.

2. Earnings stability: No deficit in the last five years covered in the Stock Guide.

3. Dividend record: Some current dividend.

4. Earnings growth: Last year's earnings more than those of 1966.

5. Price: Less than 120% net tangible assets.

*GrahamValue* recommends a minimum portfolio size of *20* for *Enterprising* grade stocks; or in other words, not more than *5%* of one's portfolio per *Enterprising* grade stock. Graham's own recommendation was closer to *30* and *3.3%*, but open-ended^{[2]}.

Note: For criterion *#4*, *GrahamValue* compares last year's earnings to that of *4 years ago*.

### 3. NCAV (Net-Net)

*Net Current Asset Value* is Graham's most well-known category of stocks, but actually included criteria for *Earnings* and *Diversification* as well.

[1.] A diversified group of common stocks at a price less than the applicable net current assets alone — after deducting all prior claims, and counting as zero the fixed and other assets.

[2.] Eliminated those which had reported net losses in the last 12-month period.

Graham recommended a portfolio size of *30* for NCAV grade stocks; or in other words, not more than *3.3%* of one's portfolio per NCAV grade stock^{[2]}.

Note: Apart from the 2nd criterion above for an EPS (TTM), Graham analyses are done almost exclusively with annual data^{[6]}.

### Video Tutorials

Given below is a playlist of *ten* video tutorials, covering both Graham's framework and its application on *GrahamValue*.

**Total Viewing Time:** *32 minutes*

Note: The filter calculators required for some of the videos are given in the links in the *Footnotes*.

## GrahamValue's Assessments

*GrahamValue* applies all of the above Graham criteria to Global Equity Markets, giving the following *four* results.

### 1. Intrinsic Value

*Intrinsic Value* is the price corresponding to a stock's *Graham Grade*. The *Intrinsic Value* for each *Graham Grade* is calculated as follows^{[10]}. *Intrinsic Values* are marked *Zero* for *Ungraded* stocks.

#### a. Defensive Price (Graham №)

The *Intrinsic Value* is calculated from the quantitative criteria (*#6* and *#7*) for *Defensive* investment, and is popularly known as the *Graham Number*^{[8]}.

Note: *Graham Numbers* on *GrahamValue* are calculated using the average EPS of the past *three* years, just as Graham required.

#### b. Enterprising Price (Serenity №)

Graham's quantitative criteria for *Enterprising* investment are the lower of *120%* of *Tangible Book Value Per Share (TBVPS)*, or a *Price-to-Earnings (P/E)* ratio of *10*. With a derivation similar to the *Graham Number*, we get the following *Intrinsic Value* calculation.

Note: This extrapolated derivation is __the only deviation__ that *GrahamValue* makes from Graham's published principles, and is required for automating Graham's *Intrinsic Value* adjustment for *Interest Rates*^{[4]}.

#### c. NCAV Price (Net-Net)

Graham recommended the applicable *Net Current Assets* alone, deducting all prior claims and counting as *Zero* the fixed and other assets. The corresponding *Intrinsic Value* calculation is popularly known as *Net Current Asset Value (NCAV / Net-Net)*^{[9]}.

Note: *GrahamValue* deducts *Preferred Stock* (both *Redeemable* and *Non-Redeemable*) in its NCAV calculation.

### 2. Graham Grade

Every stock is assigned a *Graham Grade* as follows. Preset links for *GrahamValue*'s two Graham screeners are included along with each *Graham Grade*.

#### a. Defensive

The stock meets the qualitative criteria for *Defensive* investment (*#1* to *#5*), and has a positive *Defensive Price (Graham №)*.

#### b. Enterprising

The stock does not meet the *Defensive* criteria above, but meets the qualitative criteria for *Enterprising* investment (*#1* to *#4*) and has a positive *Enterprising Price (Serenity №)*.

#### c. NCAV (Net-Net)

The stock meets neither *Defensive* nor *Enterprising* criteria above, but has a positive EPS (TTM) and a positive *NCAV Price (Net-Net)*.

#### d. Ungraded

The stock meets neither *Defensive* nor *Enterprising* nor NCAV criteria above.

### 3. Intrinsic Value(%)

*Intrinsic Value(%)* is *Intrinsic Value ÷ Previous Close*, expressed as a percentage. An *Intrinsic Value(%)* of *100%* or more indicates that the stock's *Intrinsic Value* exceeds its price.

*Graham Grade*, *Intrinsic Value* and *Intrinsic Value(%)* — in combination — give a complete unadjusted Graham assessment for a stock.

*Intrinsic Value(%)* measures what Graham defined as the *Margin of Safety*^{[11]}.

Note: *Defensive* and *Enterprising* grade stocks require their *Intrinsic Value(%)* adjusted for current *Interest Rates*^{[4]}.

### 4. Graham Ratings

Each stock is additionally given the following *Graham Ratings* that can be used for customized filtering and stock selection. The *Graham Ratings* are defined such that they're better when higher, and that Graham's *Defensive* requirements default to *100%*.

For reference, the minimum ratings required for each *Graham Grade* are given below.

Graham Rating | Minimum Values | ||
---|---|---|---|

Defensive | Enterprising | NCAV (Net-Net) | |

Size in Sales (100% ⇒ 500 Million)^{[3]} |
100%^{[5]} |
N/A | N/A |

Current Assets ÷ [2 x Current Liabilities] | 100% | 75% | N/A |

Net Current Assets ÷ Long Term Debt | 100% | 90% | N/A |

Earnings Stability (100% ⇒ 10 Years) | 100% | 50% | N/A^{[6]} |

Dividend Record (100% ⇒ 20 Years) | 100% | 5% | N/A |

Earnings Growth (100% ⇒ 33% Growth) | 100%^{[5][7]} |
N/A | N/A |

Graham Number(%)^{[8]} |
100%^{[4]}^{[5]} |
N/A | N/A |

NCAV or Net-Net(%)^{[9]} |
N/A | N/A | 100% |

[2 x Equity] ÷ Debt | 100%^{[1]} |
N/A | N/A |

Size in Assets (100% ⇒ 250 Million)^{[3]} |
100%^{[1]}^{[5]} |
N/A | N/A |

#### Preset Links

The preset links below will open the *Advanced Graham Screener* with the required *Graham Ratings* selected.

#### Footnotes

^{[1]} Substitute rating for Public-Utilities and Financial Enterprises.

^{[2]} See Graham's notes on position sizing across stock grades.

^{[3]} Requires adjustment for *Inflation*; defaults *500M* and *250M*.

^{[4]} Requires adjustment for *Bond Yields* and *Interest Rates*.

^{[5]} Requires adjustment for non-U.S. *Interest Rates* and *Inflation*.

^{[6]} Requires a positive EPS (TTM), the only non-annual figure.

^{[7]} Requires adjustment for *Inflation*; uses three-year averages.

^{[8]} *Graham Number ÷ Previous Close*, similar to *Intrinsic Value(%)*.

^{[9]} *NCAV Price ÷ Previous Close*, similar to *Intrinsic Value(%)*.

^{[10]} *GrahamValue* does not use the "Benjamin Graham Formula".

^{[11]} Similar to *Upside*, and measures the Margin of Safety.