Last week, by way of confession, I explained that I am a heretic: Though I love the concept of value, I have a tough time keeping my eyelids propped open when scouring Benjamin Graham's The Intelligent Investor for the chunklets of wisdom contained therein. I had a harder time not shouting at the book, "Get real, man! Stocks like this don't exist today!" I decided to test the relevancy of his "defensive investor" stocks in the contemporary market by screening based on the criteria he laid out. I came up empty.

We often forget, however, that Graham gave his readers a primer on finding stocks that were, to his mind, a bit riskier equities that required more scrutiny than the defensive stocks. These were stocks for the "enterprising investor." Since most Fools already fall into this category, I thought it would be interesting, if not instructive, for us to take a ride with the master one more time and see if we could screen up anything that jibed with Graham's wilder side.

Scary stuff
Graham's chapter 15, "Stock Selection for the Enterprising Investor," is my favorite section in the entire book, because it's here that Graham's personality bursts forth. Having explained to us how we should go about picking our stocks -- the defensive way -- he seems downright terrified to give us a look at the dark side. He shows us -- but with all the enthusiasm of a child venturing into a haunted house.

He stalls for several pages, first summarizing efficient market theory, then, reluctantly, explaining that his own success rests on the reality that the market is actually not efficient. What does that mean for the enterprising investor? According to Graham:

It suggests first of all that he is taking on a difficult and perhaps impracticable assignment.... But if it is true that a fairly large segment of the stock market is often discriminated against or entirely neglected in the standard analytical selections, then the intelligent investor may be in a position to profit from the resultant undervaluations.

In other words, Graham is saying that you can make money by being brave, and Foolish enough, to bet against the wise.

Fooling around with Graham
Many of Graham's investing strategies, like arbitrages, liquidations, and related hedges, aren't really suitable for mere plebes like us. But, we can, he tells us, look for promise in "secondary" stocks that meet the criteria for his enterprising investor.

Graham, or, more likely, some bedraggled intern, needed to search for stocks by sifting through clay tablets, I mean the Standard & Poor's Stock Guide. We, of course, can use online screening tools.

Don't be fooled by services offering pre-fab Graham screens! For complete archaeological accuracy, nothing beats doing things yourself. Two good and free screeners are the new Java screenertool provided by Yahoo! (NASDAQ:YHOO) Finance, and the freebie at Microsoft's (NASDAQ:MSFT) Money site.

Here are Graham's criteria for finding stocks for the enterprising investor.

Graham's Enterprising Investor Screen

  1. Is it cheap? The prima facie evidence that Graham demanded as an indication that a stock was cheap was a price-to-earnings ratio of 10 or less. (262 stocks pass this test.)

  2. Liabilities on the down-low. For the defensive investor, Graham demanded a ratio of current assets to current liabilities of two or better. Enterprising investors can get wild and crazy, dropping the current ratio down to 1.5. He also wanted total debt to be no greater than 110% of net tangible assets. We can't screen for the latter, but we can check for it later. (87 stocks left.)

  3. Earnings, please. Graham demanded no earnings deficit during the last five years. It's tough to check for this on the screener, so we'll set it aside for later.

  4. Don't forget the dividend. Graham puts the lampshade on his head again here. Instead of the long, uninterrupted history of dividends he demanded for the defensive investor, the enterprising investor can throw caution to the wind and only check for a current dividend. Setting the screener to a current dividend of more than 0.01% winnows our field to 29 prospects.

  5. Earnings Growth. Graham set the bar low. In his 1971 revision, he asked that earnings be greater than they were in 1966, or five years before. We can't screen for this either, but it's easy to check later.

  6. Price must be right. Graham was also looking for firms priced no more than 20% higher than their net tangible assets. Drat, another criterion we can't set on the screener, but since both of the free screening tools offer to export our results to a spreadsheet, it will be easy to fill in some of these numbers later and finish the screen by hand.

Not bad. Last week, we came up with a big goose egg. This time, 29 companies meet the preliminary criteria set in the screener. There are plenty of familiar names, too. Homebuilders abound, such as Pulte (NYSE:PHM) and Beazer Homes USA (NYSE:BZH). Our old friend Seagate Technology (NYSE:STX) makes an appearance, as does General Motors (NYSE:GM). There are also some pretty unfamiliar picks. PetroKazakhstan (NYSE:PKZ) or Videsh Sanchar Nigam (NYSE:VSL), anyone?

But remember, this group of 29 had only passed the criteria we could set in the screening tools. Nearly all of them fail when tested on the spreadsheet, mostly because they end up valued at more than 120% of net tangible assets, or because their debt was more than 110% of net current assets.

However, there are some survivors, listed below in no particular order.

The envelope, please
First on the list is Standard Pacific (NYSE:SPF). This homebuilder has been booming over the past several years, along with most others, but there may be sharks in these waters, as Fool Rick Munarriz explains here.

Jewelry retailer Friedman's (NYSE:FRM) is a bottom-feeder's dream, perhaps. It's shed over two-thirds of its value due to worries over government snooping into its finances. It trades at a value lower than that of its inventory, but still has plenty of downside risk. Dave Marino-Nachison gives us the scoop here.

Cheapskate hipsters (or former wanna-bes, like me) have probably owned duds produced by Haggar (NASDAQ:HGGR), purchased off the rack at the neighborhood resale shop. For me, this clothing company still brings up visions of grandpa's suits, but for value fans, the firm may be worth a closer look; just watch out for predictions of slowing earnings growth.

Part of the beauty of creating your own screens is that you can tweak them a little and see what kinds of companies come close to hitting your criteria. By widening the current ratio just a bit, I was able to net Motley Fool Hidden Gems pick Fresh Del Monte Produce (NYSE:FDP), an overlooked produce enterprise that happens to grow what I consider to be the best pineapple I've ever tasted.

The moral of the story
Even when he was at his craziest, Graham's stock-selection criteria were notably old-fashioned, and they've only become more conservative as time has passed and the average stock's P/E multiplier has advanced. But going back to the old school, even the real old school, is not only instructive as an academic exercise, it just might turn up a decent investment idea. Companies that pass this screen are flush with tangible assets, low on debt, and trading at pretty significant discounts to their earnings. They may not provide a rocket ride skyward, but odds are they've got limited room to fall.

What now?
Screening can be fun, but it can also be a lot of work. If you'd like to take a look at plenty of investment ideas each month, pre-screened by the Fool's crack team, check out our investment newsletters.

Recovering art historian and Fool contributor Seth Jayson can't help but play the archaeologist sometimes, even when he's looking for the next big investment. He owns shares of Fresh Del Monte Produce. View his Fool profile here. The Fool has a disclosure policy.