When screening for company size, the three most popular criteria are market capitalization (number of shares outstanding times market price), sales and total assets. Graham also felt that the market responds more quickly with a price increase when an improvement is shown for a large firm than for a small firm. This concern comes into play for Graham because he looked at stocks of firms that have become unpopular due to unsatisfactory developments of a temporary nature. He felt that large firms have the resources in “capital and brain power” to carry them through adversity and back to a level of satisfactory earnings. Our Graham screens are therefore broken down into two segments-utilities and the rest of the stock universe. Graham presented an investment approach specifically for utilities and industrials but suggested that additional sectors such as financials could also be selected using these criteria. Graham’s analysis for the defensive investor is divided into primary industry sectors. Graham outlined a set of criteria that helps the investor select securities offering a minimum level of quality in terms of past performance and current financial position, as well as a minimum level of quality in terms of earnings and assets per dollar of share price. This commentary focuses on the defensive investor approach. He also suggested that aggressive investors avoid new issues. Graham believed aggressive investors could expand their universe substantially, but purchases should be attractively priced as established by intelligent analysis. Graham felt that the defensive investor should confine their holdings to the shares of important companies that are in strong financial condition with a long record of profitable operations.
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