Cheap Thrills for Value Investors

 | Mar 11, 2013 | 4:30 PM EDT
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There was much discussion this weekend at Chez Melvin about a speech by Dean Williams of Battery March Financial more than 30 years ago about the perils of market forecasting. Readers will recognize the Melvinesque theme that most of us can't forecast well so why not buy what is cheap now. Williams' talk to the Financial Analysts Federation was the precursor of "React don't predict."

This inevitably spun into the topic of what is cheap now. In the past few weeks I have looked at various strategies and approaches to the market as well as what stocks to avoid. This weekend I was asked which stocks I would buy at the current price if I were building a brand new portfolio. This is an important question and we should spend time on the answer this week.

I am going to start by saying that my approach to portfolio management is very Schlossian in nature. I like to own a lot of stocks. I rarely have fewer than 30 stocks and in a steep selloff I could easily own as many as 100. Starter positions would be about 2% each and since I am a notorious scale buyer, the initial purchase would be closer to a 1% level for each stock. I am not a concentrated portfolio guy and I like to own as many cheap stocks as I can find; I count on time and reversion to provide the returns I seek to obtain.

Right now, portfolios will be heavily invested in energy, banks and international stocks. It's not a sector, market or economic call in any manner. They are just cheap so I am a buyer. I will get to those names as the week goes on, but I want to start with the names outside those sectors that I would buy if I were starting a new portfolio.

I would be a buyer of Corning (GLW) if I didn't already own the stock. I love everything about this company and it is perfectly positioned to be a monster growth stock in the next decade. Most important for our purposes it is cheap and trading for less than book value and a single digit earnings ratio. Kimball International (KBALB) has slipped off its highs after less than exciting earnings and it is back at less than 75% of book value, so I would be a buyer in a new account.

I would be a buyer of Photronics (PLAB) at current levels as well. The company makes materials used in the production of semiconductors. The stock is cheap at just 70% of tangible book value. Business has slowed with the economy but it has a strong balance sheet with more cash than debt on the books and gaining market share in a weak environment. When the marketplace recovers, so should the stock price.

I am hoping to add to Northwest Pipe (NWPX) at lower prices but a starter position in this stock should be included just in case it doesn't slip in price. The company makes the pipes used in water infrastructure projects as well as pipes used for a wide variety of energy, agricultural and industrial uses. The future for infrastructure stock is bright enough that I am willing to pay tangible book value for the stock and hope short-term dislocations give me a chance to add at cheaper valuations before boom times in the infrastructure stocks.

Although Warren Buffett hates the airline industry, I have always done well with non-legacy airline shares by paying a very low price relative to book value. At the moment, shares of the largest regional airline, SkyWest (SKYW), trade at just 60% of tangible book value so I would be a buyer at current levels. Like Buffett, I am not a big fan of gold but I am willing to be in the gold-mining business by buying AuRico Gold (AUQ) at 90% of tangible book value with its decent balance sheet.

The shipping stocks have been my albatross over the years but Tsakos Energy Navigation (TNP) is too cheap not to own. The company operates a fleet of 48 oil tankers, and the shares trade at just 20% of tangible book value.

If I spent a lot of time preparing an in-depth economic and market forecast I would probably never buy an aluminum stock as I tend to be a little cynical about when the economy will actually recover. Fortunately, I have sworn off such activities so I would be a small buyer of Century Aluminum (CENX) at 70% of tangible book value.

That's just a starting point. I'll continue my picks tomorrow.



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