Adjusting Benjamin Graham's Price Calculations Today

Graham's Value Investing framework allows for P/E ratios of 30 and more based on current U.S. bond yields.

Graham 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%.
Chapter 14: Stock Selection for the Defensive Investor, The Intelligent Investor.

Based on the same principle, a defensive investor in the U.S. today could consider stocks with P/E ratios up to 30, since 10-year AA corporate bond yields are now close to 3.3%.

100 ÷ 7.5 = 13.3
100 ÷ 3.3 = 30

Some Quick Math

Adjusting Graham's framework to screen Defensive grade stocks with P/E ratios of 30 instead of 15 (all else being equal) would involve the following:

30 ÷ 15 = 2
√2 = 1.41

We would need to multiply the Graham Number of a stock by 1.41, to adjust it to a P/E of 30.

Note: Since the Graham Number is designed to balance Earnings and Assets, stocks with P/E values higher than 30 could clear Graham's rules too if they have lower P/B values.

Screening Graham Stocks

The filter values required on Serenity's screeners for finding Defensive grade stocks with the adjusted Graham Number would be:

Graham Grade: Defensive
Graham Number(%): > 70%

Graham Number(%) is Graham Number ÷ Previous Close. The reciprocal of 1.41 is 0.70, or 70%.

So a stock with a Graham Number(%) of 70% or more will have a Previous Close that is 1.41 times its calculated Graham Number or less.

Prices for Enterprising grade stocks will have to be adjusted similarly.

Using Intrinsic Value

Intrinsic Value is the price corresponding to a stock's Graham Grade: Defensive, Enterprising or NCAV. For Defensive grade stocks, Intrinsic Value = Graham Number.

Intrinsic Value(%) is Intrinsic Value ÷ Previous Close, expressed as a percentage. Serenity's Advanced Graham Screener has a filter specifically for Intrinsic Value(%).

Considering present bond yields, Defensive and Enterprising grade stocks would need an Intrinsic Value(%) of 70% or higher to be classified as true Graham stocks today.

Note: NCAV (or Net-Net) grade stocks will require Intrinsic Values of 100% or higher. The NCAV Price is calculated based on asset values alone, which — unlike earnings yields — are not dependent on bond rates.

Comments

Based on this and how the advanced screener calculates GN, should we be looking at 1.46*GN versus previous close when considering margin of safety from a dollars perspective?

That's correct, LearningGraham!

The way to do that on Serenity's screeners is to screen for Defensive and Enterprising grade stocks with Intrinsic Value(%) greater than 70%.
Also, for Defensive grade stocks, Intrinsic Value = Graham Number.

I believe Buffet said once that a good way to see the value of a stock is by comparing its earning yield vs 10 years treasury yield. If earning yield is at least 2x the current 10 years treasury yield it is a good buy. For example, 10 years treasury yield right now is 2.3%, which means if we buy a stock with P/E of 21.74 (4.6% earning yield), that's a good buy.
It is tough to find bargain nowadays. Dow hit all time high. S&P 500 index P/E ratio is 26.16.

Thank you for your informative comment, Will!

Serenity's screeners list hundreds of stocks that completely clear Graham's requirements as of today.

Graham Resources