Trolling the New-Lows List

 | Mar 30, 2012 | 12:30 PM EDT
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One of my regular exercises in search of investment ideas is to read the list of new lows carefully. I have been doing this on pretty much a weekly basis since the late 1980s when I read an interview with Robert Rodriguez of FPA Capital Fund in which he suggested that this was how he created his shopping list for stock ideas. Back then, this took the better part of a Friday because you had to clip the list out of the Wall Street Journal and then spend the day looking stocks up in S&P or Value Line Reports by hand in actual books. Today, I can accomplish the same task in an hour or two on Friday morning with the aid of the Internet and some good coffee.

Just about every week, there are a bunch of small-cap biotech stocks on the list. I pretty much skip these automatically. I have no core knowledge or competence in evaluating biotechnology, so I ignore them. I do the same with all the Chinese stocks on the list. I trust no information out of China's governments or corporations. I made one last attempt with some net-cash stocks back in 2009 and it ended, as it always does, with cooked books and booked losses. This can be the "Century of China," as Jim Rogers calls it, without my participation.

There are some recognizable names on the list right out of the gate this morning. USEC (USU) is making new lows again. I made a little money in this stock a few years ago, but as bullish as I may be on the future of nuclear power, the costs related to the American Centrifuge Project are just too much for me to stomach. The viability of the company is in question, so I have no interest in owning it again.

RadioShack (RSH) continues to struggle and those shares are also hitting new lows. I am short a starter position of $7 April puts, so I am basically long the stock. I like its long-term outlook, so after next month, assuming the stock doesn't move above $7, I will hold the shares. I am hoping that the business will improve before the company reduces or cuts the generous 7.8% dividend yield. But at the current price-to-book value of .8 and an enterprise value (EV)/Enterprise ratio below 3, I am comfortable owning the stock.

NRG Energy (NRG) is hitting new lows and I am somewhat intrigued by this company. Its base wholesale power generation business produces plenty of excess cash flow and the company is moving into alternative generation projects, including solar and wind power. Most of the capacity is still nuclear, gas and coal but it seems that management does have an eye on the future. The company faces near-term challenges, but at 80% of tangible book value, I am interested. This one will go into my "research now" pile for further evaluation.

Natural-gas-related names are starting hit the list right now, but I think it is still early to trade in this area. The next few quarterly reports for these companies are going to look awful and the selling pressure is not even close to abating yet. This shows in the valuations of those stocks that are hitting the new-low list. Most of the stocks hitting lows still trade well above tangible book value and I am just not interested until they are at a discount. I own Exco Resources (XCO) and Penn Virginia (PVA), so I am not going to miss anything should a miracle occur and cause natural gas pricing to improve in the short term. Exco is also hitting new 52-week lows, so those without exposure to the sector might consider starting to scale into that stock.

In the wake of the recent Environmental Protection Agency (EPA) ruling, the cola stocks are hitting the list with a vengeance. The EPA has basically set standards that eliminate coal from consideration in new power plants in the U.S.

More than 40% of our electricity in this country is still produced at cola fired plants, so demand in not going to just disappear. Coal companies will be scrambling to increase their exports, as well as reducing production to deal with the new regulations and soft markets that have resulted from low natural-gas prices. The coal industry is not going to just disappear; it will remain an important source of energy both at home and around the world. The regulatory and political environment for coal continues to darken stocks such as Arch Coal (ACI), which is trading at 80% of tangible book value and is becoming interesting. This one is also at the top of my "more research right now" pile.

Reading the new-low list at least once a week is a valuable exercise. In addition to stock ideas, you can discover clues and patterns that give a better understanding of what's happening in the markets and the current economy.


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