In Search of Perfection

 | Mar 29, 2012 | 2:00 PM EDT
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As long I was in the process of searching for perfect stocks, I thought I would spend a little time searching for perfect stocks that were cheap on an asset basis in the current stock market. I set my trusty stock screener to look for companies that were priced below tangible book value, profitable and paid a dividend. I always want to avoid over-leveraged companies outside my longshot portfolio, so I further screened for companies with manageable debt loads. I always want management to be on the same side of the table with me as an investor, so I added criteria for decent levels of insider ownership. I want the people running the companies I invest in to care about the stock price as much as I do.

I did not expect to find many socks and I was not disappointed. A mere handful of companies that passed through my screen could be considered candidates for perfect-stock status. I remain cautious in general on insurance stocks but some old favorites make the candidates list. White Mountain Insurance Group (WTM) still makes the cut even after its 40% price increase over the past year. The company currently trades at 90% of tangible book value and insider's own 21% of the company. The company has been buying back stock as well, and recently bought back the almost 90,000 share stake of Berkshire Hathaway (BRK.A). They also conducted a tender offer and repurchased more than 800,000 shares under the terms of the offer. Over the course of 2011, the company bought back 647,000 shares as part of its ongoing buyback program. Management sold several non-core operations last year and ended the year with more than $2 billion of what they called undeployed capital. As long as the stock remains below tangible book value, the company will continue with its buyback operation.

National Western Life Insurance (NWLI) is a stock that I have owned several times over the course of my career and at the current price, I may have to consider buying it again. The low-interest-rate environment has hurt annuity and life insurance sales for this company and the stock has declined sharply over the past year and is trading around the 2010 lows. It is a well-run insurance company trading at just 40% of tangible book value. At that level, the stock is too cheap not to own, even thought I am somewhat cautious on the insurance sector right now.

One intriguing company on the list is THL Credit (TCRD). The business development company is associated with the private equity firm of Thomas Lee Partners and draws on their expertise in middle market financing transactions. The fund invests primarily in junior debt securities such as mezzanine financing, second liens and subordinated loans. Many of these loans include equity kickers such as warrants or preferred stock as part of the deal and this gives the company not only high levels of interest income but potential appreciation form the equity kickers. One of the more attractive features of this BDIC is that it is a fairly new company: THL Credit was formed in 2009 and went public in 2010. All of its loans are post credit crisis and this gives them an edge over companies whose loan portfolio suffered severe damage in the credit meltdown and resulting recession. As of the end of the last quarter, the company had no nonperforming or troubled loans in its portfolio. The stock trades just below tangible book value and currently yields 9.7%. Insiders own about 40% of the company so they have a vested interest in seeing the dividend remain stable and the stock price increase over time.

California First National Bancorp (CFNB) continues to make the list as well. The banking and leasing company is trading at 20% of book value and currently yields 7.27%. Insides own 80% of the shares. I have owned this stock for a while now and expect it to do very well as the economy continues to recover. In the meantime, I am getting paid well to wait.

Finding stocks that fit the definition of a perfect stock is getting more difficult. If you are willing to search in the corners of the market, you can still find a few companies that make the cut and are worth buying regardless of market conditions.


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