## Contents

### Graham's Stock Grades

### Serenity's Assessment Results

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## Graham's Stock Grades

Graham recommended three categories of stocks, with different qualitative and quantitative specifications for each category.### 1. Defensive

These were the highest quality (and costliest) stocks Graham recommended, and were required to have:

1. Not less than $100 million of annual sales.

2-A. Current assets should be at least twice current liabilities.

2-B. Long-term debt should not exceed the net current assets.

3. Some earnings for the common stock in each of the past ten years.

4. Uninterrupted [dividend] payments for at least the past 20 years.

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.

6. Current price should not be more than 15 times average earnings of the past three years.

7. Current price should not be more than 1½ times the book value.

As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5.

Criterion #1 works out to $500 million today, based on the difference in CPI/Inflation from 1971.

Graham recommended a minimum portfolio size of *10* for *Defensive* grade stocks; or in other words, not more than *10%* of one's portfolio per *Defensive* grade stock.

### 2. Enterprising

For more *Enterprising* (or *aggressive*) investors, Graham recommended stocks *"selling at multipliers under 10"* that also had:

1-A. Current assets at least 1½ times current liabilities.

1-B. Debt not more than 110% of net current assets.

2. Earnings stability: No deficit in the last five years covered in the Stock Guide.

3. Dividend record: Some current dividend.

4. Earnings growth: Last year's earnings more than those of 1966.

5. Price: Less than 120% net tangible assets.

As these criteria were written in 1971, *Serenity* compares last year's earnings to that of 5 years ago for criterion #4.

*Serenity* recommends a minimum portfolio size of *20* for *Enterprising* grade stocks; or in other words, not more than *5%* of one's portfolio per *Enterprising* grade stock.

### 3. NCAV (Net Current Asset Value or Net-Net)

Graham's most well known category of stocks, which also included criteria for earnings and diversification.

1. A diversified group of common stocks at a price less than the applicable net current assets alone — after deducting all prior claims, and counting as zero the fixed and other assets.

2. Eliminated those which had reported net losses in the last 12-month period.

Graham recommended a portfolio size of *30* for *NCAV* grade stocks; or in other words, not more than *3.3%* of one's portfolio per *NCAV* grade stock.

## Serenity's Assessment Results

*Serenity*applies all seventeen of the above Graham criteria to all stocks, giving the following four results.

### 1. Graham Grade

Every stock is assigned a *Graham Grade* as follows.

#### a. Defensive

The stock meets the qualitative criteria for *Defensive* investment (#1 to #5 above), and has a positive *Defensive Price* (see Graham Number below).

#### b. Enterprising

The stock is not *Defensive* but meets the qualitative criteria for *Enterprising* investment (#1 to #4 above), and has a positive *Enterprising Price* (see Serenity Number below).

#### c. NCAV (Net-Net)

The stock meets neither *Defensive* nor *Enterprising* criteria, but has a positive *EPS* and a positive *NCAV* (see Net Current Asset Value below).

#### d. Ungraded

The stock meets none of the above conditions and thus no*Graham Grade*can be assigned.

### 2. Intrinsic Value

The *Intrinsic Value* for each *Graham Grade* is assigned as follows.

#### a. Defensive grade stocks

The *Intrinsic Value* is calculated from the quantitative criteria (#6 and #7) for *Defensive* investment given above, and is popularly known as the *Graham Number*.

Note: *Graham Numbers* on *Serenity* are calculated using the average EPS of the past three years, as Graham required.

#### b. Enterprising grade stocks

Graham's quantitative criteria for *Enterprising* investment are the lower of *120%* of *net tangible assets*, or a *P/E* ratio of *10*. With a derivation similar to the *Graham Number*, we get the following *Intrinsic Value* calculation.

#### c. NCAV (Net-Net) grade stocks

Graham recommended the applicable *net current assets* alone, deducting all prior claims, and counting as *zero* the fixed and other assets. The corresponding *Intrinsic Value* calculation is popularly known as *Net Current Asset Value* or *NCAV*.

#### d. Ungraded stocks

*Ungraded* stocks are assigned an *Intrinsic Value* of *Zero*. Stocks are also assigned an *Intrinsic Value* of *Zero* if their calculated prices according to their respective *Graham Grades* are nonpositive.

Note: *Serenity* does not use the misunderstood Benjamin Graham Formula to calculate intrinsic values.

### 3. Intrinsic Value(%)

*Intrinsic Value ÷ Previous Close*, expressed as a percentage. An *Intrinsic Value(%)* of *100%* or more indicates that the stock's *Intrinsic Value* exceeds its price.

*Graham Grade*, *Intrinsic Value* and *Intrinsic Value(%)* — in combination — give a complete Graham assessment for a stock. Value Investing 101 provides a list of standard preloads that can be quickly applied to *Serenity's* stock screeners.

Completely *Defensive* and *Enterprising* grade stocks require an *Intrinsic Value* of *70%* or higher at today's bond yields.

Stocks with an *Intrinsic Value* of *Zero* (or hypothetically, a *Previous Close* of *Zero*) are assigned an *Intrinsic Value(%)* of *0.00%*. All *Ungraded* stocks therefore have an *Intrinsic Value(%)* of *0.00%*.

Note: Graham's framework is designed for building a complete portfolio, and not for picking individual stocks.

### 4. Graham Ratings

Each stock is additionally given the following *Graham Ratings* that can be used for customized filtering and stock selection. For reference, the minimum ratings required for each of Graham's grades are given below.

Graham Rating | Minimum Values | ||
---|---|---|---|

Defensive | Enterprising | NCAV (Net-Net) | |

Size in Sales (100% ⇒ 500 Million) | 100% | N/A | N/A |

Current Assets ÷ [2 x Current Liabilities] | 100% | 75% | N/A |

Net Current Assets ÷ Long Term Debt | 100% | 90% | N/A |

Earnings Stability (100% ⇒ 10 Years) | 100% | 50% | 10% |

Dividend Record (100% ⇒ 20 Years) | 100% | 5% | N/A |

Earnings Growth (100% ⇒ 33% Growth) | 100%^{[1]} |
N/A^{[2]} |
N/A |

Graham Number(%)^{[3]} |
70% | N/A^{[4]} |
N/A |

NCAV or Net-Net(%)^{[5]} |
N/A | N/A | 100% |

Equity ÷ Debt (for Utilities and Financials)^{[6]} |
N/A | N/A | N/A |

Size in Assets (100% ⇒ 250 Million)^{[6]} |
N/A | N/A | N/A |

^{[1]} 100% ⇒ 33% growth, 200% ⇒ 66% growth etc; read more.

^{[2]} The *Trailing EPS* has to be more than that of 5 years ago.

^{[3]} *Graham Number ÷ Previous Close*, similar to *Intrinsic Value(%)*.

^{[4]} Calculated using *Trailing EPS* and *Tangible Assets* instead.

^{[5]} *NCAV Price ÷ Previous Close*, similar to *Intrinsic Value(%)*.

^{[6]} Optional rating for Public-Utilities and Financial Enterprises.