A Sparse List of New Bargains

 | Mar 17, 2014 | 1:00 PM EDT  | Comments
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Here is the latest reason I am not a market timer: The indices opened higher this morning, which is exactly the opposite of what I had expected. I apparently assign much more weight to the mess in the Ukraine than do my fellow investors and traders, and I really thought we would see a bit more resulting ugliness in the markets. This situation has the potential to break the back of Europe's nascent recovery, and there would be spillover from this to the U.S.

So, if I were a trader, I probably would have come in short today and taken an early-morning whipping. Instead of sipping my coffee and watching events unfold this morning, I would be doing the old click-and-puke, trying to exit losing positions.

My job is to take what the market gives me, and not to try to predict what it might do. With that thought in mind, I sat down this morning and ran screens to look at the inventory creation so far this year. To give you some idea of where the market is, the screener I used this morning shows that a total of 3,623 U.S. stocks have market capitalization greater than $100 million. Only 100 of those have dropped 20% in the last quarter, even despite the noise and turmoil of earnings season.

There are some interesting names on that list that paint a picture of the current situation in the market and economy. Retail names are all over it, and such stocks as Staples (SPLS), Best Buy (BBY), Rent-A-Center (RCII) and Aeropostale (ARO) make the grade as biggest losers right now. Consumers are still shopping, but they are being very selective at the moment. If they can buy your product more cheaply online, or if you lose the fashion trend, your stock is dropping like a rock.

Now it's time to see if any value creation is going on among declining stocks and sectors -- and I have to say that I was not surprised to see a pretty small list of new bargains. After all, the Value Line Median Appreciation Index is at 30 again this week, and the ratio of market cap to gross domestic product is still at around 110%, giving us an indication that the market is priced on the high side of fair. Specifically, just nine stocks have tumbled to trade at a discount to book value, and only two names on this short list are not in the energy sector.

One of these two is Meadowbrook Insurance (MIG), whose stock price fell by 21% in the last quarter as earnings once again disappointed the Street and investors dumped out of the stock. Meadowbrook is sporting a very high combined ratio, as it's been difficult for the company to bring underwriting losses and expenses back in line.

I suspect Meadowbrook may go on the for sale block before too long. The stock is currently trading at just 72% of book value, and it appears to be a bargain for long-term investors. After months of bad news, any sort of improvement in the business could cause a strong pop in the stock price. Management also expects the company's net 2014 operating income to be between $25 million and $35 million, or between $0.50 and $0.70 per share. If Meadowbrook can actually get to that level this year, the stock should move up to around its current book value.

Hhgregg (HGG) makes the loser list as well. The electronics-and-appliance retailer missed earnings expectations, and the Street does not see a lot of reasons to be optimistic on it right now. Big-box retail is just not a very good business at the moment.

However, I think we may be overlooking the fact that the hhgregg is profitable, and that it is expected to be profitable again this year. The company is adding furniture and home-fitness lines as it attempts to offset the decline in consumer-electronics sales in U.S. brick-and-mortar stores. The company has also initiated a price-match policy in order to more effectively compete with the online retailers, such as Amazon (AMZN), that are taking so much market share in the space.

It may take a long time to see a turnaround in hhgregg, and you may well spot some more opportunities to buy the stock lower this year. But, with the stock trading at 82% of book value, it is probably worth starting a small position in hhgregg at current levels.

Of the remaining seven companies on the above-mentioned bargain list, all are involved in energy and mining. They either dig, drill or transport stuff that comes out of the ground, and this is an interesting and potentially wildly profitable group of stocks. I will cover them more fully on Tuesday.

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