Graham-Dodd Stock Screener
About Graham-Dodd Stock Screener
Security Analysis is arguably the most important book on value investing. You might be surprised, but there is no valuation methodology in the book. Benjamin Graham and David Dodd did not provide any indication that they used a formula or a specific algorithm for determining intrinsic value of common stocks.
The book, quite appropriately, is named "Security Analysis", not "Security Valuation". In the sections related to common-stock investment, it contains description of a general approach to selecting stocks. There is also a good treatise on how to adjust the income statement and balance sheet and what factors to look at in a comparison valuation. But you will be looking in vain for a well defined valuation process. Nonetheless, Security Analysis is a great book. It clearly distinguishes investing from speculation, and arms the investor with general guiding principles of investing.
The stock screener presented here is not the one used by the founders of the security analysis, but the one developed by us using the general approach to security valuation they employed. The stock screener compares intrinsic value of a stock with its current market price. The difference between them is called the margin of safety.
Following the spirit of Benjamin Graham and David Dodd's teachings, we assume that intrinsic value (V*) of a stock is composed of the following three components (on a per share basis):
- Tangible book value (TBV), which serves as a proxy for assets' replacement costs or assets' fair value.
- Value attributed to retained earnings, which are defined as the difference between Net Income (NI) and Dividends (Div). The value of this component is calculated as the value of a perpetual bond with the coupon equal to the company's average yearly retained earnings, and the required rate of return for retained earnings (RRRre) of 20%.
- Value attributed to dividends. The value of this component is calculated as the value of a perpetual bond with the coupon equal to the company's average yearly dividend (Div) and the required rate of return for dividends (RRRd) of 10%.
Thus, using the Graham and Dodd's approach to security selection we came up with the following very simplified formula for valuation of common stocks:
V* = TBV + ((NI – Div) / RRRre) + (Div / RRRd)