Graham and Buffett Buys

10/02/2013 8:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

We've found two stocks that meet the investing criteria of both Warren Buffett, and his value investor mentor, Benjamin Graham, says J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

To find stocks meeting both the Buffett and Graham criteria, we looked for:


  • 1. Free cash flow of more than $20 million.


  • 2. Net profit margin of more than 15%.


  • 3. Return on equity of more than 15%.


  • 4. Current price is lower than Standard & Poor's discounted cash flow value.


  • 5. Market capitalization of more than $1 billion.


  • 6. Value Line Financial Strength rating of B+ or better.


  • 7. Positive earnings growth during the past five years with no deficits.


  • 8. Dividends currently paid.


GNC Holdings (GNC) is a specialty retailer of health and wellness items. These include vitamin, mineral, and herbal supplements, and sports nutrition and diet products.

GNC has more than 8,300 locations, including 6,200 retail locations in the US (958 franchise stores and 2,190 Rite Aid franchise store-within-a-store locations). Franchise operations are situated in 55 countries.

GNC's new Gold Card rewards program has been a huge success, although the introduction of the card was costly. The Gold Card provides members with significant savings and could help boost sales and earnings during the next several quarters.

GNC is expanding its store-within-a-store and e-commerce presence in China. GNC's expansion offers substantial opportunities for the company.

Sales increased 10% and EPS surged 23% during the last 12 months. I expect sales to increase 11% and EPS to climb 20% to 3.05 for the 12 months ending June 30, 2014.

The 21.5 current P/E is somewhat high, but GNC's growth is impressive. The company's balance sheet is solid, the dividend yield is modest, and GNC's shares are medium risk.

United Stationers (USTR) is a leading wholesale distributor of business products, with sales of $5 billion. The company stocks a broad range of 130,000 items.

USTR maintains 64 distribution centers that deliver products to 25,000 dealers. This network enables the company to ship most products overnight to more than 90% of the US and to offer next-day delivery to major cities in Mexico and Canada.

Sales in the industrial supplies category, with sales up 31.5%, profited from the acquisition of OKI Supply in the fourth quarter of 2012. I expect sales to increase 5% and EPS to climb 9% during the next 12 months.

At 14.0 times current EPS, and with shares selling well below Standard & Poor's discounted cash flow value of 53.30, the stock price is undervalued.

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