Value -- It's Not For Everyone

 | Feb 22, 2012 | 3:10 PM EST
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I spent a lot of time last night and this morning thinking about cheap stocks and those of us who buy them. The passing of two of the very best practitioners of value analysis this past week, Walter Schloss and Ed Anderson, reminds me that the pool of cheap-stock buyers is actually shrinking over time. Most of what passes for value is some form of contrarianism or relative value -- real value investing provides too little action and requires too much patience for most people.

With that thought in mind, I sat down this morning and ran screens looking for stocks that remain truly cheap in the current market. As has been the case in recent months, the list is primarily banks, insurance companies and other financial institutions. (You find more names in the micro-cap sector, which is consistent with my thought that deep value investors need to avoid larger companies that are distorted by index and ETF trading.)

One non-financial company that is on the cheap list is John B. Sanfillipo and Sons (JBSS). The grower and marketer of nuts saw earnings improve dramatically last quarter in spite of declining shipments. The company was able to increase prices across its entire product line and restore margins closer to historical norms. The company foresees record prices for nuts (especially peanuts and walnuts) to continue climbing as worldwide supply and demand imbalances exert upward price pressure. The stock trades at just 60% of tangible book value, and the Z-Score of 3 indicates that the company is safe from financial difficulty as well. It is not the most exciting company in the world, but it is safe and cheap and could easily find a home in most deep-value portfolios.

The screen is also populated by a lot of stocks that have been mentioned before as deep-value investment candidates. Several of my favorite banks make the list, including Sun Bancorp of New Jersey (SNBC) and First Interstate Bancorp (FIBK). Jon Heller has mentioned closeout retailer Tuesday Morning (TUES) as a cheap stock and potential net current assets bargain on several occasions. All of these are candidates for inclusion is a deep-value portfolio in the current market.

One bank that caught my eye as I went through the list is pretty much a poster child for what is going to happen in the small bank sector over the next few years. Park Sterling Bank (PSTB) is a small bank in North Carolina that recently merged with a slightly smaller competitor. As a result of the merger, Park Sterling gained exposure to new markets in the Carolinas, increased its asset base by more than 90% and most important improved the quality of its loan portfolio. Park Sterling reported fourth-quarter nonperforming loans that were just 2.96% of total loans for the quarter -- that percentage would have been north of 5% had the merger not been concluded. The combined bank now has more than $1 billion in assets and should be able to grow throughout the Carolinas and Virginia over the next few years. Of course, the addition of new branches and improved loan quality also raises the bank's profile as an acquisition candidate for a larger institution that wishes to expand in the region and potentially improve its balance sheet.

The stock is cheap at the current levels. Park Sterling currently trades at 77% of tangible book value. Post-acquisition, the tangible-equity-to-assets ratio is still a little over 16x, so the company has plenty of excess capital. The stock is a strong candidate for a deep-value portfolio in spite of the bank stock rally so far this year.

Finding cheap stocks takes a lot of effort and research. Profiting from them takes a lot of patience ... and ability to endure long periods of boredom. Fortunately most people cannot do it, and the field remains thin. The fewer adherents to deep-value investing, the more the rest of us stand to earn over the years.

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