"My research indicates that the best results come from simple earnings criterions."
His multiple criteria for selecting investment-quality stocks have remained the most reliable. What makes an "investment-quality stock"?
- Financial condition is conservative and working capital position is strong. (Check the Balance Sheet).
- Earnings are reasonably stable, allowing for business conditions that fluctuate over a 10-year period. (Check the Income Statement).
- Average earnings bear a satisfactory ratio to market price. (Check the Valuation).
- Quantitative data are useful only to the extent that they are supported by a qualitative survey of the enterprise.
- The companies with the best investment potential are consistently profitable.
- The P/E ratio should be low compared with those of other companies in the same industry.
- The P/E ratio establishes the upper share price limit on intrinsic value.
- Earnings and other estimates should err on the side of understatement. That, in itself, makes for a margin of safety.
Ben Graham's checklist for finding undervalued stocks