Revisiting a Simple Value Line Screen

 | Jan 07, 2013 | 3:30 PM EST
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The kids went back to school this morning and all the houseguests are gone, so we are pretty much back to normal here at Chez Melvin. It was a blissfully quiet weekend, allowing me time to watch a lot of football and catch up on some screens and tests that I had been planning to run for the past two weeks.

In addition to the insider data I have been studying, I am prepping some other data and testing projects for 2013 that should be both interesting and profitable. As I began the year, I sat down and looked at some basic screens that I hadn't used in a while, to see if anything interesting popped up.

One simple screen I used was to take the Value Line universe of stocks and look for stocks that traded below book value but also had Value Line's two highest rankings for year-ahead performance. The screen handily beats the market over the past 25 years, with an average annual return that is 70% better than the broad market.

Like many value screens and methods, it finds stocks that lag the market in strong up years but handily outperform it in down and relatively flat years. The combination of fundamental improvement and momentum as measured by the ranking systems and low price relative to book value also doesn't produce many names -- it averages just 10 stocks in the portfolio over the years. It is a very short list right now, and that is to be expected after this market's recent run-up.

One of the more interesting companies on the list has exposure to the pharmaceutical and biotech areas, two sectors that are expected to show solid growth in spite of a weak economy. Albany Molecular Research (AMRI) is a contract research firm that serves the big pharma and biotech sectors. It is one of the few companies that offer services throughout the drug-development process, from discovery to manufacturing. The company also collects royalties on sales of Allegra, a top-selling allergy drug. There is also something of a call option built into the stock, as it has several proprietary drugs in its early stage portfolio that could provide additional income streams in the future.

The company could benefit from some strong trends in the industry. Increasingly, big pharma is looking to outsource much of the discovery, testing and manufacturing process. Albany Molecular also has global facilities that can potentially lower costs for its customers. Results have been showing steady improvement, and the company has inked long-term contracts with the National Institute of Health and Eli Lilly (LLY). Trading at 80% of tangible book value, Albany Molecular Research is an interesting and cheap way to invest in the future of pharmaceuticals and biotechnology.

Lincoln National (LNC) is the cheapest financial stock on the list right now. The insurance and asset-management company has seen its share price improvement a little over the past two months, but the stock still trades at just 60% of its tangible book value. Growth should be driven by its retirement plans and annuity business as the population continues to age and looks for assistance in acquiring and managing a retirement nest egg. The company has a strong presence in the variable annuity marketplace, and that has some investors concerned about regulatory issues surrounding the controversial product. Lincoln maintains that it has focused on fund performance and hedged all of its riders and death benefits and expects little to no problems in this area.

The company has been very shareholder-friendly over the past two years. It has increased the dividend payout by 140% and bought back more than $1 billion worth of stock. At a recent investment conference management, Lincoln said it will continue to direct cash flow toward additional share repurchases. At the current price, I believe the risks are more than priced into the stock, and I believe you can join management as a buyer of the stock.

One of my long shots makes the list as well. I will not rehash the entire case for Popular (BPOP), but I will note that the stock's ranking was increased by Value Line, and the shares trade at just 70% of tangible book value. The bank has been selling off troubled assets and rebuilding its balance sheet. To reach its full potential, it must show improvements in the Puerto Rican real estate markets, and it needs to pay off its TARP money, so the ride could be bumpy. However, this is a stock with the potential for huge long-term returns.

This simple screen does not turn up many names, but it is worth running on a regular basis. It has been a solid performer, and the current names seem to have strong long-term potential for investors.

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