The most successful investors have had a mentor for guidance during their formative years.
Even Warren Buffett, one of the world's greatest investors, gives credit to his instructor for his success. While it is possible to learn through experience in the stock market, having a mentor greatly shortens the learning curve.
The market is a treacherous place and learning by trial and error can be costly and destructive to your portfolio. Fortunately, investors don't need to have a personal relationship with an investing mentor to succeed in the stock market. In fact, the same educational information available to Buffett is available to regular investors like you and me.
Buffett credits economist, professor and investor Benjamin Graham as being his mentor during his learning years.
Graham had such a profound effect on the young Buffett, that he named his son Howard Graham Buffett in honor of his teacher. Only Buffett's own father had more of an influence on him than Graham.
Graham is most known as being the originator of value investing. Along with teaching the technique as a professor at Columbia Business School, Graham wrote the book "Security Analysis" to pass along his strategies to all investors. This book, along with the subsequent "The Intelligent Investor," are among the most respected writings in all of finance.
There are many "folksy" but very true maxims in Graham's writings. For example, quotes like "The investor's chief problem and even worst enemy is likely to be himself" and "To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks."
Matt Schulz, who is my colleague and editor of StreetAuthority's sister website, InvestingAnswers, did a great job providing Graham's best words of wisdom here. While these maxims make solid investing sense, they offer little in actionable investing advice.
Out of Graham's 10 rules, I was able to simplify and summarize them into eight concise rules that should steer every investor's decisions...
Only focus on stocks with...
1. A price-to-earnings (P/E) ratio of less than 15.
2. A price-to-book (P/B) ratio of less than 1.50.
3. A positive book value.
4. A current ratio greater than 2.
5. A five-year average earnings per share (EPS) growth that is greater than 3%
6. A period of five years of positive earnings.
7. A minimum yearly revenue of $400 million.
8. Multi-year dividend growth recorded.
With these simple eight rules in mind, here are two stocks that meet almost all of Graham's stock-picking criteria.
1. HollyFrontier (NYSE: HFC)
This U.S.-based petroleum refiner operates five refineries and boasts a capacity of 443,000 barrels per day.
Fundamentally, the company hits seven modern Graham rules -- it misses the P/B ratio criterion by a fraction. Annual EPS growth books at 23%, the current ratio is at 2.37 and the company has grown its dividend 15% in the past five years.
The P/E ratio of around 10, a P/B of 0.87 and annual EPS growth of 6%, combined with a current EPS ratio of nearly 5 and dividend growth of 8% during the past five years make a strong fundamental case for this stock.
Technically, shares have hit resistance at $13 with a quadruple top on the daily chart. A breakout close above the $13 level would create a solid breakout entry opportunity.
Risks to Consider: While following Graham's investing rules can lessen your chances of losses and place the odds in your favor for success, nothing is certain in the market. The most researched and attractive stock could easily plunge lower on information yet unknown. Always use stops and position size properly when investing.
Action to Take --> Both of these stocks meet Graham's golden rules of stock-picking. Holly Frontier is a good "buy" right now and Corning on a breakout close above $13 makes solid investment sense. My 18-month target on Corning is $18 if the entry is triggered and $65 on Holly Frontier.