Stalking the Super-Cheap

 | Mar 12, 2012 | 2:40 PM EDT
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Most of the conversations, research and analysis this morning is devoted to the art of NCAA Bracketotlogy. The tournament pairings have been announced and most of the business world is hard at work trying to craft a perfect bracket. With all the upsets in the conference tournaments this past weekend, a perfect bracket does not seem as easy as it may have just a week ago. I have never come close to bracket perfection, so I will just enjoy the great story of Loyola (Baltimore pride!) and spend some time reviewing the world of cheap stocks.

I sat down this morning and ran my "super cheap" screen to see whether any new ideas popped up. I run this screen several times a month, looking for companies that are trading at no more than 70% of book value. Unlike many of my other deep-value screens, I do not add any other valuation parameters for debt, cash flow or insider activity; I just want to see stocks that cover the whole gamut of cheap, be it distressed, traditional or special situation. Most of the list ends up on the cutting room floor, but doing the work is a worthwhile exercise nonetheless.

European banks and financials are still very cheap -- almost all of them are trading below half of book value. Most have moved up in the wake of ECB liquidity measures, and I am not sure I would chase them here even though they are "cheap." I have exposure to the sector in Royal Bank of Scotland (RBS), Bank of Ireland (IRE) and Aegon (AEG), all bought when the sentiment on the eurozone was more pessimistic. I am not selling these at their current valuations, but they have moved up nicely and I am not in a hurry to add to my European positions. If you don't own anything in this space, I would look to sell puts on bad news to back into these super-cheap stocks.

One interesting name that popped up is Republic Airway (RJET). The company is still talking about selling the Frontier Airlines division and focusing on the legacy regional airline business. The stock had popped when this plan was initially announced but has since pulled back; no one seems interested in Frontier at a decent price and it is highly unlikely that a financial buyer (such as private equity) will emerge anytime soon. Frontier has seen revenue and load factor increases recently, but these improvements have not been enough to flush out interested buyers. The company could spin off Frontier to shareholders, but that wouldn't raise the cash needed to support the legacy and easing business. Value is in the air at 30% of tangible book, but there are a lot of moving parts here. This is one that needs substantial homework before we dive in.

A lot of my current holdings are on the list. CommonWealth REIT (CWH) is still one of my favorite long-term real estate plays; the high-yielding stock trades at just 40% of tangible book value. SWS Group (SWS) is still cheap at just 50% of book value, and I am confident in management's ability to turn around the banking and financial services firm. Puerto Rican banking concern Popular (BPOP), one of my favorite long-shot banks, is cheap and 60% of tangible book value. I still hold my Japanese banks: Both Mitsubishi UFJ (MTU) and Mizuho (MFG) are well below book value.

One thing I see when reviewing all of these stocks -- even though they are super-cheap at current levels, they are well off their 52-week lows. They are cheap enough to buy, but you need to stay small and move slow. When buying super-cheap stocks it is still important to make Mr. Market work for you by being a scale buyer.

Now I have to get back to picking the Final Four. I am thinking Kentucky, Cincinnati, Carolina and Missouri. Before using my picks, keep in mind that I have bet the Orioles to make the playoffs every year since I was old enough to walk into a casino. Unlike picking stocks, my record with sports bets is a tad spotty.

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