The New Benjamin Graham Value Investor
After weeks of consultation with Roy Ward, I’ve decided to make the following changes to the Cabot Benjamin Graham Value Investor.
1. Consolidation of Cabot Value and Enterprise Models
In November 2014, Roy started a new model called Cabot Enterprising Model. The rationale was to include stocks with higher risks for a more ‘enterprising’ investor. Ben Graham distinguished an enterprising investor from a defensive investor in his book The Intelligent Investor as:
“The defensive (or passive) investor will place his chief emphasis on the avoidance of serious mistakes or losses. His second aim will be freedom from effort, annoyance, and the need for making frequent decisions. The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort, in the form of a better average return than that realized by the passive investor.”
My plan is to continue to include some of the Enterprising stocks but consolidate the Value and Enterprising models into one portfolio to make it easier for you to follow.
In the second edition of the book, Security Analysis, Benjamin Graham noted “... and therefore the process of valuation, while seemingly mathematical, is in reality psychological and quite arbitrary.” My consolidated model will focus more on the qualitative factor of business, industry and the economy than the previous models. Occasionally, I will present a special recommendation on a ‘Deep Value Stock,’ which may or may not be contrarian in nature. Deep Value Stocks are stocks whose growth potential is largely ignored by the market. In coming issues, I will write more on Deep Value Stocks and how to identify them.
Issues will publish on the second Thursday of the month, and Weekly Updates will be published on all other Thursdays.
2) More Educational Materials and Book Reviews
Although Cabot takes diligent care in issuing stock recommendations and follow-ups, our subscribers are ultimately responsible for their own investment decisions. That said, I will send you frequent educational materials to help you to make sound investment decisions.
3) Gradual Change in Portfolio Size
I plan to decrease the number of stocks in the current portfolio to a more manageable number. Currently, Value and Enterprising Models have around 60 Buy and Hold positions, and I plan to gradually reduce the number of stocks to around 20 stocks.
4) Less Financial Jargon
In upcoming issues, I plan to use fewer financial and accounting terms, in hopes of appealing to a broader audience of investors. That said, you may always send me an email if you would like deeper financial insight.
5) Top 275 Value Stock List
The Top 275 Value Stock list will no longer be available, as we have found that most subscribers do not use it. Moreover, I believe that I can provide much more value by committing my time to researching new stocks.
6) Maximum Buy and Minimum Sell Prices
I will discontinue Maximum Buy and Minimum Sell Prices but in my recommendations, I will provide suggested ranges for buying and selling.
7) Special Reports on Individual Stocks
I will occasionally issue a special report with a comprehensive analysis on a stock that I believe to be a ‘Strong Buy.’ My reports will include detailed valuation models, industrial outlook, competitive analysis, business strategy, financial data and more. Such reports are typically very expensive, however, your subscription to Benjamin Graham Value Investor will include access to all these reports.
Weekly Update
Note that Cabot Benjamin Graham Value Investor issues will publish on the second Thursday of the month, and Weekly Updates will be published on all other Thursdays.
The market has shown some positive movements, with the S&P 500 up 1.5% on the week. Among the sectors, healthcare (+2%) gained the most, driven by Johnson & Johnson (+2.4%), AbbVie (+6%) and United Health (+3%).
Fed Chair Janet Yellen reiterated the policy of 2% inflation target with a focus of maximum employment. It is widely believed that there’s the possibility of a rate hike before the end of the year from the current target rate of 1% to 1.25%. Warren Buffett in his recent interview with Becky Quick at CNBC reaffirmed his view that the current stock market is not at a high valuation relative to the 230-basis-point rate of U.S. 10 year Treasury Notes. In other words, he implied that stocks with a current yield of ~4-5% are better alternatives to a 2.3%-yielding bond.
In this weekly update, I summarize the latest news for Thor Industries, which released its earnings last week, beating the street estimates, and GM, which reached Roy Ward’s Min Sell Price. Prices appearing after each stock symbol are the closing prices on October 4, 2017.
Thor Industries (THO: 125.92) recorded record revenue of $7.2 billion for fiscal year 2017 compared to $4.5 billion revenue in 2016, largely due to its acquisition of Jayco and its own organic growth. The operating profit margin slightly decreased from 8.6% to 7.7%, largely due to the change in product mix after the Jayco acquisition.
In the U.S., approximately 9 million of the total 118 million households own RVs. Most of these RV owners are retired Baby Boomers, a population that’s expected to grow approximately 2% per year until 2021. Thor, with around 16% share of the trailer and RV industry, is expected to benefit from this growth. In addition, early market news indicates that there is a trend among millennials to buy RVs, though it would be speculative to make a long-term projection on this recent trend. That said, with a decent valuation and a healthy profit margin, I recommend that you hold THOR. HOLD.
General Motors (GM 43.78) has hit Roy’s Minimum Sell Price. I recommend that you sell the stock above 42.57 and take the quick profit. SELL.