Benjamin Graham — Warren Buffett's mentor and founder of Value Investing — recommended a P/E ratio no higher than 13.3 based on an AA bond yield of 7.5%.
Our basic recommendation is that the stock portfolio, when acquired, should have an overall earnings/price ratio—the reverse of the P/E ratio—at least as high as the current high-grade bond rate. This would mean a P/E ratio no higher than 13.3 against an AA bond yield of 7.5%.
Based on the same principle, a defensive investor today could consider stocks with P/E ratios up to 37, since 10-year AA corporate bond yields are now close to 2.69% [March 2015].
Adjusting Graham's criteria to screen Defensive grade stocks with P/E ratios of 37 instead of 15 (all else being equal) would involve the following:
37÷15 = 2.467
√2.467 = 1.57
We would need to multiply the Graham Number of a stock by 1.57, to adjust it to a P/E of 37.
Note: Since the Graham Number is designed to balance Earnings and Assets, stocks with P/E values higher than 37 could clear Graham's rules too if they have lower P/B values.
For example, the filter values for finding Defensive grade stocks adjusted to a P/E of 37 would be:
Intrinsic Value(%) > 65%
65% is used for the Intrinsic Value(%) because the reciprocal of 1.57 is 0.6367, or 63.67%; and Intrinsic Value = Graham Number for Defensive grade stocks.
Prices for Enterprising grade stocks can be adjusted similarly as well.
Considering today's bond yields, Defensive and Enterprising grade stocks with an Intrinsic Value(%) exceeding 65% on Serenity could be considered true Graham stocks.