Kicking Rocks in Search of Stocks

 | Jan 06, 2014 | 1:30 PM EST  | Comments
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laco

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It is the first week of trading in the new year, and it looks to be a busy one, according to the traders I talked to today. We have all sorts of economic news, including the ADP and jobs reports that have been market movers in recent months. Desks and research departments will be fully staffed again, and worst of all, Congress comes back into session this week, so we can look forward to some potentially idiotic news. This morning, I sat down, muted the TV and ran my screens for the first time this year.

The results are as depressing as the weather forecasts for the northern part of the nation. There simply are not a whole lot of stocks for deep-value investors to choose from. Each month, the list of stocks that are safe and cheap according to my basic measures has shrunk. Inventory is disappearing as prices climb, but very few stocks are falling to levels that draw my enthusiasm and cash expenditure. Net-nets -- stocks that trade for less than the cash per share on the company's balance sheet -- are virtually nonexistent at the moment, as are negative-enterprise stocks that are not biotechs. It is a tough time for a deep-value type to put new money to work.

There are still some opportunities around if you are just coming into the game with a batch of new money to put to work, and this week we will kick some serious rocks, looking for stocks to buy. Unless we get a crash this week, we won't be able to come up with anywhere near a fully invested portfolio, but I suspect that will turn out to be a good thing. There are still a lot of flashing lights and a lot of very smart people expressing concerns about market levels.

If you do not already own the stock, then shares of Rowan Companies (RDC), a drilling-services company, are worth considering here. Some analysts around the Web have been criticizing Rowan for hoarding cash and not taking on more debt to expand the business or buy back stock, but I am pretty content with the company's choices in the current environment. Rowan will take delivery of four new deep-water rigs in the next few years, and this could drive earnings and the stock price higher over the next several years. The stock trades at just 89% of book value and earns a Piotroski F-score of 7. I have done well with this stock in the past and expect to do even better over the next three to five years.

Lakes Entertainment (LACO) is going to make the grade this year. The casino operator lost a contract to run an Indian casino last year, and that has hurt operations, but prospects are improving, Lakes got a large cash payout form the tribe, and its new Maryland casino is up and running with strong early results. The company is apparently a little worried about attracting the wrong kind of attention, as it recently adopted an anti-takeover rights offering as a potential defense. The stock is trading at just 82% of tangible book value and has more than 75% of the share price in cash and short-term investments on the books. The F-score is 5 right now, but I expect that to improve as the new casino continues to add to the bottom line.

My lone retail stock pick from 2013 remains a buy as well. Trans World Entertainment (TWMC) continues to move toward higher-margin merchandise and less dependence on the music and video business. The company trades at about 76% of book value and earns an F-score of 6 right now. Trans World has negligible debt and more than half of the stock price in cash on the balance sheet, so it has the financial strength and flexibility to survive until it can thrive when consumer spending picks up.

Using the screen for safe and cheap stocks, I'm not seeing a lot of buys right now. The vast majority of stocks I have uncovered have less than $50 million in market cap and are too illiquid to write about here. While older portfolios may be more fully invested, it is going to be tough to get new money to work at the moment, but I will keep kicking rocks and looking for stocks.

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