## Contents

### Graham's Stock Grades

### Serenity's Assessment Results

## Graham's Stock Grades

Benjamin Graham recommended *three* categories of stocks, with *seventeen* qualitative and quantitative specifications.

### 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.

Graham allowed for individual exceptions to the above, if the portfolio as a whole cleared all criteria. Graham also noted that *Utilities* were more likely to clear the above; and modified criteria *#1*, *#2-A* and *#2-B* for *Utilities* and *Financials*^{[1]}.

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]}.

Note: Criterion *#1* works out to *$500 million* today when adjusted for inflation^{[3]}.

### 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.

*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^{[2]}.

Note: For criterion *#4*, *Serenity* compares last year's earnings to that of *4 years ago*.

### 3. NCAV (Net-Net)

*Net Current Asset Value* is Graham's most well-known category of stocks, but actually included criteria for *Earnings* and *Diversification* as well.

[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^{[2]}.

Note: Apart from the 2nd criterion above for an EPS (TTM), Graham analyses are done almost exclusively with annual data^{[6]}.

## Serenity's Assessment Results

*Serenity* applies all of the above Graham criteria to global equity markets, giving the following *four* results.

### 1. Intrinsic Value

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

#### a. Defensive Price (Graham №)

The *Intrinsic Value* is calculated from the quantitative criteria (*#6* and *#7*) for *Defensive* investment, and is popularly known as the *Graham Number*^{[8]}.

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

#### b. Enterprising Price (Serenity №)

Graham's quantitative criteria for *Enterprising* investment are the lower of *120%* of *Tangible Book Value Per Share (TBVPS)*, or a *Price-to-Earnings (P/E)* ratio of *10*. With a derivation similar to the *Graham Number*, we get the following *Intrinsic Value* calculation.

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

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 (NCAV / Net-Net)*.

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

### 2. Graham Grade

Every stock is assigned a *Graham Grade* as follows (preset links for *Serenity*'s two Graham screeners are included).

#### a. Defensive

The stock meets the qualitative criteria for *Defensive* investment (*#1* to *#5*), and has a positive *Defensive Price (Graham №)*.

#### b. Enterprising

The stock is not *Defensive* but meets the qualitative criteria for *Enterprising* investment (*#1* to *#4*), and has a positive *Enterprising Price (Serenity №)*.

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

The stock meets neither *Defensive* nor *Enterprising* criteria, but has a positive EPS (TTM) and a positive *NCAV Price (Net-Net)*.

### 3. Intrinsic Value(%)

*Intrinsic Value(%)* is *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.

Note: *Defensive* and *Enterprising* grade stocks require an *Intrinsic Value(%)* of *70%* based on current *Bond Yields*^{[4]}.

### 4. Graham Ratings

Each stock is additionally given the following *Graham Ratings* that can be used for customized filtering and stock selection. The *Graham Ratings* are defined such that they're better when higher, and that Graham's *Defensive* requirements default to *100%*.

For reference, the minimum ratings required for each *Graham Grade* are given below.

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

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

Size in Sales (100% ⇒ 500 Million)^{[3]} |
100%^{[5]} |
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% | N/A^{[6]} |

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

Earnings Growth (100% ⇒ 33% Growth) | 100%^{[7]}^{[5]} |
N/A | N/A |

Graham Number(%)^{[8]} |
100%^{[4]}^{[5]} |
N/A | N/A |

NCAV or Net-Net(%)^{[9]} |
N/A | N/A | 100% |

[2 x Equity] ÷ Debt | 100%^{[1]} |
N/A | N/A |

Size in Assets (100% ⇒ 250 Million)^{[3]} |
100%^{[1]}^{[5]} |
N/A | N/A |

^{[1]} Optional rating for Public-Utilities and Financial Enterprises.

^{[2]} See Graham's notes on position sizing across stock grades.

^{[3]} Criteria for *Company Size* have been adjusted for inflation.

^{[4]} *70%* when adjusted for bond yields and interest rates.

^{[5]} May require customization for non-U.S. economies.

^{[6]} Requires a positive EPS (TTM), the only non-annual figure.

^{[7]} 200% ⇒ 66% growth etc; years 1, 2, 3 and 10, 11, 12 used.

^{[8]} *Graham Number ÷ Previous Close*, similar to *Intrinsic Value(%)*.

^{[9]} *NCAV Price ÷ Previous Close*, similar to *Intrinsic Value(%)*.