Ben Graham, Joel Greenblatt Shorts in EuropeVW Staff
Morgan stanley analyst Ronan Carr with the strategic team of Graham Secker, Ronan Carr, Matthew Garman, Krupa Patel and Hanyi Lim applies Ben Graham’s guidelines described for value investors to the European market, but for shorting in a new report. A look at Ben Graham, Joel Greenblatt shorts, and European stocks with low Piotroski scores.
In March 2006 (Intelligent Investor, Chapter 14) we applied to the European market the guidelines described for value investors in Ben Graham’s famous book (Chapter 14, Stocks for the Defensive Investor). Here we turn several of the criteria on their head to look for potential sell ideas. Criteria: market cap above US$500mn; weak earnings track record – at least 1 of last 10 years EPS <0; EPS growth <33% last 10 years; expensive valuation 1) P/E: P/3-year average EPS is >20% premium to market multiple. Expensive valuation 2) P/E x P/BV is >20% premium to market multiple.
Reverse Intelligent Investor (Ben Graham Inspired) Screen
We have back-tested the performance of such a strategy historically. Screening annually with a 6-month holding period, absolute performance was negative in 8 of 19 years. In 12 of 20 years the average relative performance was negative.
The 3 O’s Screen
Overvalued stocks are within the 100 least attractive on our private equity screen. Over-owned stocks have at least 67% of broker ratings as buys. Over-loved stocks have average relative share volume for last 52 weeks of at least 120% of the 3-year average and have outperformed in the last 12 months.
Low Piotroski Score of 0-2
The Piotroski Score rates stocks on financial strength and profitability. Piotroski’s system is simple as it consists of nine criteria to which a stock is given one point if it passes and zero if it fails. The higher the final score, the better. Here we focus on stocks with a score of 0-2. We use a universe limited to stocks with a minimum liquidity constraint (average daily traded volume of $3.5 million). For full details see Revisiting Piotroski – A Guide to Corporate Financial Health, 6 October 2008.