Three Qualitative Measures from Benjamin Graham

[1] Defensive Stock

Summarized from Chapter 14 of The Intelligent Investor - Stock Selection for the Defensive Investor:

1. Not less than $100 million of annual sales. [Note: This works out to $500 million today based on the difference in CPI/Inflation from 1973]
2. [A] Current assets should be at least twice current liabilities. [B] Long-term debt should not exceed the net current assets.
3. Some earnings for the common stock in each of the past 10 years.
4. Uninterrupted [dividend] payments for at least the past 20 years.
5. A minimum increase of at least one-third in per-share earnings in the past 10 years.
6. Current price should not be more than 15 times average earnings.
7. Current price should not be more than 1-1⁄2 times the book value.

Based on (6) and (7),  

• Price < 15 * EPS
• Price < 1.5 * NAPS

Thus,

• Price ^ 2 < 15 * EPS * 1.5 * NAPS
• Price ^ 2 < 22.5 * EPS * NAPS
• Price < (22.5 * EPS * NAPS) ^ 0.5

Graham Number is (22.5 * eps * book value per share) ^ 0.5 and Stock Price < Graham Number is considered undervalued.

Or alternately,

(22.5*EPS*Book Value) ^ 0.5 > Stock Price

22.5 * EPS * Book Value > Stock Price ^ 2

22.5 * EPS * Book Value > Stock Price * Stock Price

22.5 > Stock Price * Stock Price * 1/EPS * 1/Book Value

22.5 > P/E * Price/Book

Graham Number is designed to quantitatively assess any stock that meets the Defensive qualitative requirements, regardless of sector or industry.

• A public utility company that is typically low on Earnings will need a higher than average asset figure to justify its price. 
• A Financial Services company that is typically low on assets will need a higher than average Earnings figure to be an acceptable investment.

Graham recommended a minimum portfolio size of 10 for Defensive stocks, or in other words, not more than 10% of total investment per Defensive stock.

[2] Enterprising Stock

 This is for For Enterprising investors who are looking for greater profits - and are willing to put in more effort into the maintenance of their portfolio

Summarized from Chapter 15 of The Intelligent Investor - Stock Selection for the Enterprising Investor: [Note: For issues selling at P/E multipliers under 10]

1. [A] Current assets at least 1 1⁄2 times current liabilities. [B] Debt not more than 110% of net current assets.
2. Earnings stability: No deficit in the last five years covered in the Stock Guide.
3. Dividend record: Some current dividend.
4. Earnings growth: Last year's earnings more than those of 1966. [Note: Corresponds to the earnings of 5 years ago]
5. Price: Less than 120% net tangible assets.

Price < 1.2 * NAPS and Price < 10 * EPS
Price ^ 2 < 1.2 * NAPS * 10 * EPS
Price < (12 * NAPS * EPS) ^ 0.5

or

12 > P/EPS * P/NAPS

It applies to any stock that meets the Enterprising qualitative requirements, regardless of sector or industry, because it's a combination of both Assets and Earnings. A lower value in one will have to be compensated for by a higher value in the other.

Serenity's recommendation is for a minimum portfolio size of 20 for Enterprising stocks, or in other words, not more than 5% of total investment per Enterprising stock.

[3] NCAV or Net-Net Stock

This is for investors who were willing to put in the most effort into the maintenance of their portfolio.


Summarized from Chapter 15 of The Intelligent Investor - Stock Selection for the Enterprising Investor:

1. "Bargain Issues, or Net-Current-Asset Stocks"
2.   "...price less than the applicable net current assets alone - after deducting all prior claims, and counting as zero the fixed and other assets."
3.  "...eliminated those which had reported net losses in the last 12-month period."

NCAV = (Current Asset - Total Liabilities) / NOSH

Click here for detail write up on Graham NCAV and NNWC

References:-

• Investing for Beginners with Benjamin Graham -serenitystock
• Definition of 'Graham Number'
• The True Way to Use the Graham Number and Formula - Jae Jun