An Old-Fashioned Approach

 | Jan 09, 2014 | 4:00 PM EST  | Comments
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Stock quotes in this article:

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As we continue our search for investable ideas, I want to turn to an old-fashioned statistical service that I use to find cheap stocks. The Astute Investor is a monthly publication that list stocks trading below book value and have an earnings yield of more than 16%, as well as a list of stock trading below net current asset value. Of course, this can be replicated with an online screener, but in just about every issue, I find a stock or two that I had overlooked that is worth further investigation. I use online services almost daily but I am just old-fashioned enough to enjoy sitting down with a highlighter and marking off interesting stocks in each issue. Also, the paper is much easier to take out to the lanai with my coffee in the morning.

The new issue came in the mail over the weekend, so I perused it for new ideas and information that might be of use in the new year. One thing that popped right off the list was how many mortgage real estate investment trusts are on the list. This group has been hit hard by taper fears and interest rate movements lately, but it is now has a washed-out feel to it. Shares of m-REITs like Annaly Capital (NLY), Two Harbors Investment (TWO) and American Capital Agency (AGNC) make the 16% list this month, and they show strong insider buying in recent months. I dipped a toe in the mortgage waters last week by buying some Apollo Residential Mortgage (AMTG) and I'm investigating others now. If they stop going down, the high yields make them high-return investment candidates over the next few years.

I also noticed many Chinese companies on the list. I've heard people talk on the Web about wading into Chinese net-nets and book-value bargains, and I have one piece of advice for them: just don't do it. In my experience, China stocks are still entirely untrustworthy, especially the smaller ones. Unless you can count the cash and watch it deposited in the vault of a U.S. bank, the safe assumption is the books are cooked. Avoid them, no matter how cheap they seem to be.

Many of my little banks made the book 16% list again this month. Independent Bank Corp. (IBCP) is trading at just 85% of book value and has a high earnings yield. The bank serves the Michigan area and has 72 branches with about $2 billion in assets. The bank recently exited the government's TARP program and started paying dividends on its trust-preferred securities recently, so positive things are happening. There are a few moving parts on the balance sheet, so this needs further investigation, but it's definitely a candidate worth considering.

Old Second Bancorp (OSBC) shows up on the list as well. The bank has 27 branches in the greater Chicago area with around $2 billion in assets. Conditions have improved at the bank in recent months and a consent order from the Office of the Comptroller of the Currency was lifted in the third quarter of 2013. The bank is a long way from being out of its difficulties, but the trend is in the right direction. It will need additional capital or a restructuring at some point in the not too distant future. I might move this one more into the long-shot classification than a typical community bank investment, but if it pulls off a full recovery, the upside could be enormous.

It's also worth noting that stocks that turned up in earlier searches, like Trans World Entertainment (TWMC), Richardson Electronics (RELL) and Lakes Entertainment (LACO), are still on the 16% list. These names should be in every deep-value investor's portfolio right now. They fall solidly into the too-cheap-not-to-own class of stocks.

The search for safe and cheap stocks, as well as intelligent long shots and turnarounds, will continue despite what I consider inflated market levels. But the market could care less what I think, so I need to pay attention to finding investable opportunities regardless of what the markets does.

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