Published On: Mon, Jun 15th, 2015

Enough for the Man Who Taught Buffett

It could be the last big bargain left in the world’s highest-flying equity market — the only stock in China cheap enough for the father of value investing.

Of all the 2,854 companies on mainland exchanges, this $2.3 billion fabric producer from China’s eastern Shandong province is the only one that passes the test laid out by Benjamin Graham in “The Intelligent Investor,” his 1949 treatise on stock picking that inspired market legends from Warren Buffett to Seth Klarman.

Say hello to Luthai Textile Co.

A supplier to global brands like Zara and Marks & Spencer, Luthai has all the attributes Graham relished: low debt levels, consistent earnings and reliable dividends to name a few. It’s also among just a handful of companies getting left behind by the unprecedented boom in Chinese shares.

Benjamin Graham
Benjamin Graham in New York, April 21, 1947. Source: AP photo

Of course, that only makes Luthai cheaper versus a mainland market that’s surged 150 percent in 12 months. The company’s foreign-currency B shares, up 27 percent in the same period, trade at a price-to-earnings ratio 90 percent lower than the median on Chinese exchanges.

It’s a discount big enough to lure some of the world’s largest investors. T. Rowe Price, First State Investments and AllianceBernstein have all bought Luthai stock in the past year, while Norway’s sovereign wealth fund and the Bill & Melinda Gates Foundation both have stakes — an unusually high-profile cast of shareholders for a company with little profile on the world stage.

Mr. Market

“If you look at China stocks, it would be a very hard push to find a company with a better long-term track record,” said David Devine, a Hong Kong-based managing director at Lynas Capital Ltd., whose firm owned a 4.4 percent stake in Luthai as of December, according to data compiled by Bloomberg.

Granted, there’s no guarantee that China’s version of Mr. Market — the manic-depressive invoked by Graham to illustrate the fickle nature of securities prices — will suddenly start paying up for Luthai.

In a rally where record numbers of novice traders are pouring money into initial public offerings and high-tech stocks, a textile company that listed shares in 1997 is hardly a hot pick for China’s investing masses.

Qin Guiling, Luthai’s board secretary, and Zheng Weiyin, the company’s representative of securities affairs, didn’t answer interview requests over phone or e-mail. Luthai shares rose 3 percent at 2:52 p.m. local time.

Graham Screen

For BMO Global Asset Management, Luthai ranked among the top 2 percent of global stocks when the firm bought a stake for its low-volatility equity fund in October 2014. The antithesis of the typical Chinese individual investor, BMO uses a series of quantitative models — some of them inspired by Graham — to pick undervalued shares.

“We do aim to identify similar companies,” said Jay Kaufman, a portfolio manager at BMO in Chicago. “I’m not surprised that Luthai meets the criteria.”

Graham, who died in 1976, had seven requirements for stocks he deemed appropriate for “defensive” investors. Here are the metrics he spelled out and how Luthai stacks up:

* Company size – Graham, who taught Buffett at Columbia University, used a rough guideline of at least $100 million in annual revenue, designed to exclude small companies that are subject to “more than average vicissitudes.” Luthai reported sales equivalent to $994 million last year.

*Financial strength – Current assets of at least twice current liabilities (Luthai’s ratio is 2.06) and long-term debt below net current assets.

*Earnings stability – Positive earnings for each of the past 10 years. Luthai has made money every year since 1998.

*Dividend record – Uninterrupted dividends for at least 20 years (adapted to 10 years given a dearth of long-term data in China). Luthai has declared annual cash payouts every year since Bloomberg began compiling the data in 1998.

*Earnings growth – A minimum annualized rate of 2.9 percent over the past decade. Luthai’s is more than 10 percent.

*Price-to-earnings ratio – The stock should trade at no more than 15 times average earnings over the past three years. Luthai’s ratio is 11.6.

*Price-to-book ratio – Below 1.5. If the price-to-earnings ratio is lower than 15, however, a higher multiple is acceptable when the product of the two ratios is below 22.5. Luthai has a price-to-book ratio of 1.51 and a product of 17.5.

(An earlier version of this story corrected the spelling of Columbia University.)

 

[“source – bloomberg.com”]