PostHeaderIcon Possible blue chip stocks to buy in the Philippine stock market using the Graham Number (For the year 2015)

Last month (August 2015) The Philippine stock market plunged 6.7%, wiping out this year’s record gains mainly due to the impact of China’s slowing economy. The PSEi, the Philippines benchmark index closed down 487.97 points to 6,791.01, the largest 1-day drop since June 2013.

As of the time of this writing the PSEi is at 7,089.01 still way below its all time high of 8,127.48 index points in April of 2015.

Market players are confused as of the moment. A lot of people are cutting losses to have some cash on hand in case the market goes up. Some are staying in the sidelines and adopting a wait and see attitude. Others say its time to buy, as stocks will eventually recover.

So is it time to sell or time to buy? Considering the drop in the prices of stocks, there’s definitely blood and the streets and hence a good time to buy, but what stock should you buy? Are prices really cheap? How is “cheap” defined? How do we know which stocks are cheap to buy and based on what?

A quick way to determine this is using what is known as the Graham Number. The formula is attributed to the late Benjamin Graham, known as the “Dean of Wall Street,” Graham is widely known as the father of value investing, a style of investing we advocate in this blog.

In Graham’s seminal work, “The Intelligent Investor” he gives us an idea on how to determine if a stock is a good buy or not. In chapter 14 of the book he said:

“Current price should not be more than 1½ times the book value last reported. However a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. 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. (This figure corresponds to 15 times earnings and 1½ times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)”

From this we obtain the formula:

Graham Number

The resulting number is in theory, the maximum price that a good intelligent and defensive investor should pay for the given stock. A stock that is priced below the Graham Number is considered as having good value  (undervalued) compared to the price that the market is offering and therefore should be a possible buy.

Using the Graham number formula we now compute and determine which stocks in the PSEi are possible buys.

Possible stocks to buy using Graham Number 2015

Take note that I use the word “Possible Buy” since the Graham number is subject to certain limitations and if a stock is a possible buy, I recommend investigating further to determine if you should buy it or not. (Limitations will be discussed in another post)

Further the Graham Number is just one of the tools Graham gave us and is recommended for the defensive value investor. If you are an “aggressive” value investor, you might consider other Graham investing techniques or other techniques in valuing the above-mentioned stocks.

A “Don’t buy” means there is no need to investigate further as of now basing on the Graham number, as the stock is “expensive” from a defensive value investing point of view.

You can use the Graham number as indicated until the end of this year. Buying below the Graham Number of the above-mentioned stocks does not guarantee a successful investment but it will certainly ensure that you have a certain margin of safety as the stocks below the Graham Number is considered as undervalued.

I don’t have time to do all of the Graham Numbers for all stocks listed in the Philippine stock exchange (I am looking forward to doing it sometime soon though), but hopefully I have given you an idea on how you will be able to do it and has in the process given you an idea on how to do stock market investing more intelligently.

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    D’ Intelligent investor is one of the first few updated value investing blogs in Asia and probably the only updated value investing blog in the Philippines where you can learn stock market investing through intelligent investing that makes business sense. The stock market investing strategies are very different from what most stock market players advocate. The strategies featured here are mainly value investing principles more specifically inclined with what are perceived to be Warren Buffett’s style of investing. Other value investing strategies by great value investors such as Benjamin Graham, Peter Lynch, John Boggle among others are also featured.