For defensive stocks, the Value Investing framework of Benjamin Graham — Warren Buffett's mentor — required a 33% increase in earnings over the past decade.
The Earnings Growth rating on Serenity is based on the following Graham rule:
5. A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.
The Earnings Growth rating is therefore to be interpreted as follows:
A value of 100% indicates 33% growth, or Earnings 1.33 times that of 10 years ago. A value of 200% indicates 66% growth or Earnings now 1.66 times, and so on.
The Earnings Growth rating is expressed as a percentage of Graham's requirement — rather than the percentage of growth itself — for the sake of uniformity. A stock is considered fully Defensive when all its Graham Ratings are 100%.
The years used for calculating the averages are the fiscal years 1, 2, 3 and 10, 11, 12 previous.
Note: Since the upper limit of any earnings growth calculation is theoretically infinite, this rating is capped at 1,000,000.00%.
50% For U.S. Stocks
It may be worth noting that the inflation rate in the U.S. in the 10-year period that Graham wrote the above rule for was about 33%.
Considering that the inflation rate in the U.S. during the past ten years has been closer to 16%, an earnings growth of 16% may be sufficient for a stock to qualify as Defensive today. This would correspond to a Earnings Growth rating of 50% on Serenity.
Note: Non-U.S. economies such as the U.K. may continue to require an Earnings Growth rating of 100%.
Given below is a sample Earnings Growth rating calculation, using three years of EPS values each at the beginning and end of the period:
($13.97 - $5.14) ÷ $5.14 = 1.72 (172% growth)
Rating = 1.72 ÷ 0.33 = 5.2058 = 520.58% (of the growth Graham required)