Is a Benjamin Graham Inflection Point on the Way?

LONDON -- These are, indeed, difficult times. A few short weeks ago, the FTSE 100 (INDEX: ^FTSE) was up at 5,965, with talk of 6,000 and beyond coloring our thoughts. Now, we're hovering around 5,500, having dipped below 5,300 on several occasions. The heady confidence of early spring, in short, seems like another world. What has happened?

The mood has changed, principally. It's clear that global demand has weakened significantly, and that the eurozone's travails are deeper than previously thought. Here at home, you only have to look at the latest inflation figures. Farther afield, markets tanked yesterday on news of weak manufacturing data from China, the U.S., and the eurozone.

More gloom to come?
Of course, some will say "I told you so." As I wrote in December, for instance, Deutsche Bank was saying as far back as last September that there could be three more recessions in the next decade -- with the first hitting us around now.

I don't have to tell you that the U.K. is now in a technical recession, Europe is in a deeper one, and economic activity is slowing down sharply in China and the U.S. Throw in Moody's downgrading of 15 major global banks -- including Royal Bank of Scotland,HSBC, and Barclays, -- and the mood music is sounding decidedly more downbeat than back in April.

Don't panic, Mr. Mainwaring!
At times like these, I'm minded to ask myself what Ben Graham would be doing -- or Warren Buffett, or Sir John Templeton -- all three of them being renowned value investors with a track record of capitalizing on uncertain times to grab juicy bargains.

In short, around the corner could be just the time to pick up some of those bargains -- decent businesses with share prices driven down by adverse sentiment. Buffett in particular, for instance, is well-known for making big contrarian calls. At the height of the credit crunch, for example, he locked in some remarkable deals with America's General Electric and Goldman Sachs.

Don't go with the pack
Take the views of Sir John Templeton, who died in 2008: "If you buy the same securities that everyone else is buying, you will have the same results as everyone else."

Instead, he urged: "Heed the words of the great pioneer of stock analysis, Benjamin Graham: 'Buy when most people -- including experts -- are pessimistic, and sell when they are actively optimistic.'"

These days, the words of Buffett -- himself a former student at Benjamin Graham's investing classes, don't forget -- are more widely quoted, but they amount to exactly the same thing: "Be fearful when others are greedy, and be greedy when others are fearful."

So what would Graham be buying?
In short, he'd be running the rule over some stocks, searching for enticing bargains. For, as Buffett has famously pointed out, shares are a uniquely perverse commodity: People cheer when they go up in price and mourn when they become cheaper. For just about everything else, it's the opposite.

Indeed, as I've written before, back when Rolls-Royce (ISE: RR.L) was plagued by an exploding engine on a Qantas jet and the doomsters were deserting the shares in droves, I picked up a decent slug of them at 598 pence. They're now at 846 pence -- and meanwhile, the FTSE has largely gone nowhere. My only regret: not buying more.

And earlier this month, I picked up some shares in another FTSE 100 blue chip, at a price that it last reached in December 2008. Since then, it has grown its sales, profits, and dividends. Coincidentally, Warren Buffett has been buying exactly the same stock -- and, what's more, doing what I've been doing: buying more on dips in the share price. Discover its name in this free special report from The Motley Fool: "The One UK Share That Warren Buffett Loves." It's free, so what have you got to lose?

Where to look?
Now, when shares are priced in "screaming buy" territory, investors need strong nerves. And it's a fact that not every investor has the nerve required.

When the FTSE slumped to below 3,500 on March 9, 2009, for instance, plenty of investors stayed on the sidelines for months afterward -- thereby missing out on the ensuing 50% rise in London's flagship index. And that's the point: It's not about buying when others are mildly worried, pretending to be fearful, or idly thinking about selling. It's about buying when people are genuinely rushing for the exit -- or the bathroom -- as fast as they can. And it takes a strong constitution.

Five to follow
So here, without further ado, are five businesses that look to me to be too cheap. They're not classical Benjamin Graham shares on every metric, but then, few companies are. Debt, for instance, precludes many. Nevertheless, if Graham were alive today, I reckon these five would be among the prospective picks that he'd be running his rule over, watching and waiting -- not with the intent to buy today or even next week, necessarily, but to do the groundwork in preparation for a buy, should the share price become significantly cheaper in the weeks ahead.


Closing Price, June 21 (pence)

Forecast Yield

Forecast P/E









Tesco (ISE: TSCO.L)




AstraZeneca (ISE: AZN.L)




BAE Systems




To me, all these companies seem solid businesses with share prices that have been dragged down by the market's general travails.

Indeed, Aviva's yield, at more than 10%, seems remarkable. But there's no quibbling with the dividend cover of nearly two, and no sign of the meltdown that the doomsayers have been predicting.

Would Benjamin Graham buy them? Sadly, we've no way of finding out: He died in 1976. What I can say, though, is that Graham's student Buffett owns a decent-sized stake in at least one of them.

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