The Value Investing framework of Warren Buffett's mentor allows for P/E ratios of 30 and more based on current bond yields.
What Graham Wrote
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%."
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.
The filter values required on Serenity's screeners for finding Defensive grade stocks with the adjusted Graham Number would be:
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.
Intrinsic Value is the price corresponding to a stock's Graham Grade: Defensive, Enterprising or NCAV (Net-Net). For Enterprising grade stocks, Intrinsic Value = Serenity 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 U.S. stocks would need an Intrinsic Value(%) of 70% or higher to be classified as true Graham stocks today. This customization may differ for for non-U.S. economies.
c. NCAV (Net-Net)
NCAV (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.
Warren Buffett explains how the Intrinsic Value of a stock is dependent on prevailing bond yields and interest rates.