Kelley Wright is the chief investment officer and portfolio manager of IQ Trends Private Client Asset Management and the managing editor of the Investment Quality Trends newsletter. He entered the industry in 1984 as a stockbroker; first at a private investment boutique and later at a major NYSE wire house. In 1990, Mr. Wright left the sell side of the industry for private investment management and has served as chief investment officer for three money management firms.
For Ben Graham-style value investors, the path to success begins with sticking to this six-point test for new longs, says Kelley Wright of Investment Quality Trends.
If you’re a value investor, my guest today, Kelley Wright, is going to talk to us about his criteria for finding value in companies and in the stock market. So Kelley, talk about the criteria you use to kind of find value in the stock market.
Sure. I wish it was something real esoteric—you know, we could say, “Okay, here’s the double secret”—but actually what we use is a set of six criteria that just come from our old grandfather, Benjamin Graham. Very simply:
So, we’ve got a lot of numbers in there: 25 years, 12 years for earnings, 12 years for dividends. Really the significance of those is that a normal business cycle is going to last about four years. So, over the course of 12 years, you’re going to get three full business cycles. Then, in terms of 25 years, you’re going to get the whole soup to nuts. You’re going to get inflation, deflation, expansion, recession, bull market, bear market, the whole nine yards.
So, what it boils down to is we’re looking for consistency, for continuity, and for companies that know how to put either their services or their products in a favorable light to consumers so that they buy and that the earnings continue to come in.
You know, there are over 15,000 publicly-traded companies, and when you pour those 15,000 through these simple little criteria, we actually eliminate all but 330 to 340 companies.
Let me ask about the dividend side of that. For instance, Apple (AAPL), who typically doesn’t pay a dividend—although maybe they will start doing it on a regular basis now—it’s a company that didn’t pay dividends but had strong earnings, increasing earnings, even though maybe an expensive stock. Would that still meet the criteria of value if you thought 600 would go to 1,200?
Well, the thing is that the real value to a company in terms of how we measure it is the return to the investor, and there’s nothing more fundamental than the cash dividend.
When you have a company that’s paid a cash dividend for an extended period of time, what happens then is that company can sort of develop a pattern of high and low dividend yield. That makes our job a lot easier, because we can see it.
Buyers are attracted to it when the yield is at X, and that interest starts to wane as the dividend yield goes closer and closer to Y. So without a dividend history, and without a pattern of high and low dividend yield, it makes it really difficult to value a company.
Apple, which is just now going to pay a dividend for the first time, all we know is that at $600, Apple is going to yield 2%, but we really don’t know how to extrapolate that out. So, we’ll have to wait and see until Apple grows up.
Alright. Finally, you’d love everything to meet all six criteria all the time, but is it a dealbreaker if it’s four of the six that meet criteria?
Not at all. Not at all. Actually, a company will stay in our roster as long as they keep at least four of the criteria. The only one that’s really sacrosanct is the uninterrupted dividends, and if their S&P earnings and dividend quality ranking falls below B+. Other than that, we have quite a few stocks in our roster that maintain for this.