Revisiting a Favorite Strategy

 | Jan 09, 2012 | 4:00 PM EST
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Coming into this new year, I plan to buy only the cheapest of the cheap stocks with a few domestic banks, some international banks, U.S. shopping centers and hotels on the sheets. Last week, I discussed some of the stocks I want to short as the market rises in order to capitalize on an opportunity to exploit the volatility I am anticipating this year.

The flip side of the volatility is that at some point we will see the type of selling that allows us to establish long positions in stocks that fit the profile of deep-value asset-based investing. With that in mind, I am running those screens that have been the most successful in the past in search of ideas and candidates to buy when this happens. The first screen is my core screen based on the investment style of legendary asset-based value investor Walter Schloss. The screen looks for stocks that trade below tangible book value, have low levels of debt and enough insider ownership to put us all on the same side of the table. This screen has been my single best source of profitable ideas for many years now.

Right now the screen has many of the stocks you would expect to find given the tough market for financial stocks in the past year. Two of my long- term holdings, Kansas City Life (KCLI) and National Western Life Insurance (NWLI) are on the list. Both are trading at multiples of book value that make them compelling purchase candidates. National Western is trading at 40% of book value and is actually growing earnings in the current difficult environment. Kansas City Life is trading at 50% of book and insiders own 50%. Both are worth buying if you do not already own them and adding when the market weakens.

Another old favorite also makes the list. I do not own shares of Towne Bank (TOWN) right now but I have in the past and expect to do so again in the near future. The southeastern Virginia bank is trading at 80% of book value and has been able to grow deposits and assets this year. The equity-to-assets ratio is a little over 12 and non-performing assets are just 2.21 of total assets. With 26 branches and over $4 billion of assets the bank is one of the largest in Virginia. Insiders currently own a little more than 18% of the shares. This is yet another bank that has traded TARP funding for Treasury Small Business Lending funding, resulting in huge decrease in dividend expense.

SeaChange International (SEAC) is another old favorite that is on the list this year. The company is in the video-on-demand business and offers products and services that allow companies to offer VOD services to its customers. The company's customers include most of the larger cable television providers in the U.S., Europe and Latin America. Management's decision to pursue the software side of the business and emphasize the lower margin hardware line is starting to show up in the results. In the third quarter, it showed revenue gains and reversed the year-ago loss. When the economy picks up and cable companies begin to spend again and increase their video-on-demand offerings, this company will have a very bright future ahead of it. Right now the stock trades just below book value, carries no debt and holds about a third of the market value in cash. Insiders own about 10% of the company.

The list of companies that fit the Walter Schloss screen criteria is not overly long right now. This has historically been indicative of a market that was not particularly cheap. When I look at the few technical and statistical indicators I consider mildly reliable, the market is not even close to being oversold and the short-term indicators are actually on the overbought side of the ledger. I would suggest opening a position in NWLI and KCLI if you do not already own them, but I am only planning to buy the cheapest of stocks right now. Build your list and keep in mind that patience pays.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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