Benjamin Graham Investing: Which Stocks Would Warren Buffett's Teacher Buy Today?

Image Source: Equim43 via Wikimedia Commons. 

Recently, Berkshire Hathaway CEO Warren Buffett was named the second richest person in the world, second only to his friend Bill Gates, with a net worth of $75 billion. While Buffet is a household name, what many may not know is that he owes much of his philosophy and success to a far less prominent individual. 

Rare is man that makes it to the top on his own, and Buffett will be the first to tell anyone who will listen that studying under, and working for, the 'father of value investing' changed his life. Yes, I am referring to Buffett's mentor Benjamin Graham. While much of Graham's methods and formulas might not quite work today, it is instructive to see just what the man that taught Buffett everything he knows would be doing in the stock market today. And, who knows, we might just find a few interesting investment candidates as part of our journey. 

Who was Benjamin Graham?

Benjamin Graham, originally 'Grossbaum', was born in London, England in 1894. His family moved to New York City when he was young and Graham grew up in Manhattan. As a young man he showed an aptitude for not only the arts (he was fluent in Greek and was also a fantastic dancer) but mathematics, eventually attending Columbia University. It was here that he would begin to make his mark, not only as an academic bought as a investor.

Before Graham, investing was entirely speculative. Insider trading was rampant. Rumors flew, along with stock prices. Graham sought to eschew all of this. He wanted to be scientific about investing. He sought to buy shares for less than they were reasonably worth to a private investor. A true businessman. The idea is simple but at the time it was extraordinarily innovative. To people like Warren Buffett, the methodology of value-investing was not only life-changing, but extraordinarily attractive and commonsense at its base. 

Graham's style

So just what is "Grahamanian Value Investing"? Graham, to put it simply, sought to buy a dollar bill for fifty cents. While this strategy, in its implementation, is still a solid mix of art and science, Graham is and should still be credited with bringing a methodology to investing. 

Benjamin Graham is formulaic approach to investing evolved over the years. He started out looking for cigarbox, stocks selling for less than the value of the underlying assets and what they could be liquidated for in a fire sale, and as this became less and less of an option because of its popularity he shifted to buying shares of companies at low price to earnings ratio's.

One could spend an entire day running different screens on the different methodologies that Graham used over the years. The Benjamin Graham that wrote security analysis was not the Benjamin Graham that wrote the intelligent investor. So, for the sake of argument, and with the full knowledge that it's 2016 and generations of value investors have grown up learning of management grams methods, let's keep this simple.

Here are the five stocks with market capitalization is above $500 million, trading for less than half of their tangible book values, but also happen to have been profitable over the last 12 months: 

Source: S&P Global Market Intelligence. 

Why are they cheap?

To anyone that has looked wholeheartedly into Graham's methodologies, it quickly becomes apparent that the businesses in question are frequently in trouble. This did not bother Graham, and his solution was to buy a large basket of "cheap" stocks (his portfolio frequently had over 100 stocks in it).

We have some good leads here, but we need to do some vetting:

Costamere (NYSE: CMRE) - Costamere happens to be one of the larger owners of international container ships in the world. It's fleet of 70 vessels make sure of goods and services traverse the seven seas safely and international trade run smoothly.

Unfortunately, the natural competitiveness of such a commoditized industry in conjunction with custom mirrors questionable balance sheet leverage (it has over $2.5 billion in assets and just under 1.6 billion and liabilities) make this one a likely no-go. One becomes all the more confident in this assessment with the news that 12 million shares were sold on the open market in November 2016 at $6 per share for "general corporate purposes and the repayment of debt". This is an obvious sign of desperation, and besides - nobody likes dilution. Pass. 

MBIA Inc. (MBI -11.03%) - MBIA, a key player in the mortgage and Bonne insurance market, may not sound too appealing to anyone with memories of the 2008/2009 financial crisis at the forefront of their mind. But make no mistake, it has a lot to offer those that aspire to follow and Benjamin Graham's footsteps.

While shares have been weighed down by worries concerning MBIAs insurance of Puerto Rico's government debt, at just 40% of tangible book value investors are more than protected. It has been estimated that insurance would have to put up 450 million in the event of Puerto Rican default. NBA is one of several insurers that are exposed and both some $3.6 billion in a tangible equity. They will survive the current turmoil.

MBIA also happens to be trading for a lower price-to-tangible book and than it has in a long time:

MBI Price to Tangible Book Value data by YCharts

This fact, coupled with it's record of modest profitability, and relatively unleverage balance sheet ($11.8 billion in assets and $8.1 billion and liabilities as of September 30, 2016), makes MBIA a strong candidate for any Grahamanian investor. Candidate. 

Transocean (RIG -4.09%) - Transocean is a victim of the current secular downturn in the oil and gas industry. While it has been on a modest uptick in the past few months, the future is hazy at best.

True, the company sells for a large discount to with tangible book value, but it's fleet itself is particularly old when compared to its competitors. It will likely be a year or two before offshore oil drilling picks up, which means its rigs will continue to age and day rates for its rigs will continue to lag behind competitors. Pass. 

Atwood Oceanics (ATW) -- Unlike peer Transocean, Atwood Oceanics boasts a younger fleet and a much healthier debt profile.

These positive side, investors should be forewarned: revenue and earnings continue to drop amidst the drastic downturn in the sector. Revenue in the company's recent fourth-quarter fiscal year 2016 results fell 40% year-over-year and prophets were practically break even at $4.2 million.

Short-term results would not have scared Graham, especially were he to get a look at Atwoods balance sheet. As of September 30, 2016 it had 4.5 billion in assets and just 1.23 billion and liabilities. It's current operating environment is less than ideal, but Atwood is highly likely to make it through the current storm. Candidate.

Noble Corporation plc (NEBLQ) -- as with any other oil offshore drilling contractor, Noble Corp. is doing the best they can to sojourn on in the current environment. The shares the slide from the mid 40s down to their current $6 quotation has obviously been painful to shareholders, but for interested investors seeking to follow in the footsteps of the dean of value investing they are certainly worth a look.

Noble house over 30 rigs to offer customers, which are younger than the average relative to most of its peers. Current day rates are lower than previous years (as might be expected with oil still 50% below its highs of 2014), but the company will likely be able to survive. As of September 30, 2016 it had 12.6 billion in assets and 7.76 Jillian and liabilities – one could do worse in such a capital intensive industry. At just a quarter of tangible book value, shares are definitely worth a look for venturesome value investors.

Foolish final thoughts

While there are not a plethora of stocks Graham might be interested in available on the open market today it is clear that even eight years into a bull market there are cheap stocks to be found for those looking to follow in his footsteps.

Is the quintessential teacher, one who planted trees so that future generations could sit in the shade, nothing would make Benjamin Graham happier than to know investor continue to look for fundamental values amidst the speculative noise on Wall Street.