Invest Like a Legend

 | Apr 16, 2014 | 4:30 PM EDT  | Comments
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Stock quotes in this article:

nwli

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psem

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twmc

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hgg

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hall

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fsys

As part of my ongoing effort this week to ignore all the market noise and stay focused on valuations, I ran a screen looking for stocks that passed my Walter Schloss filters. The legendary investor said that he looked for companies with low debt levels and high insider ownership and whose stock traded for less than book value. That sounds simple enough, but few stocks qualify.

In all, 51 non-bank stocks make the grade as Schlossian bargains. Just seven of those have market caps larger than $100 million. This is consistent with every other screen I have run this week. Most of the real bargains are among the smallest companies, where indexers, short-term traders and large traders are not involved due to size restrictions. Deep-value investors need to think small to find potential big winners right now.

Insurance companies are well represented on the list of potential bargains. Four of 10 larger companies have insurance-related operations. I have been a big fan of both Kansas City Life (KCLI) and Northwestern Life Insurance (NWLI) for years. These are not complicated companies. They sell life and health insurance, as well as annuities. They stick to basic conservative investment management policies and just chug along, tending to business and making money. Northwestern trades at just 61% of book value and insiders own 38% of the company. Kansas City Life shares fetch 66% of book value and insiders own 29% of the company. Both stocks offer investors a chance to own well-run insurance companies where management interest is closely aligned with that of shareholders.

Hallmark Financial Services (HALL) is a Texas-based financial services company that operates several independently run insurance companies serving specialty markets. It sells standard commercial insurance and workers compensation insurance, as well as non-standard personal automobile, multi-line specialty property, and motorcycle insurance. The specialty division sells mostly difficult-to-place accounts, primarily commercial auto, surplus lines general liability, excess umbrella and energy. It also sells general aviation and professional liability insurance. The company has been consistently profitable, with just one losing year in the past decade. During that time, book value has more than doubled. The stock currently trades at just 70% of book value and insiders own 65% of the company.

Loews Corp. (L) has significant insurance operations as the majority own of CNA Financial (CNA), a leading property and casualty company. It also has significant energy-related operations with a controlling interest in Diamond Offshore Drilling (DO) and Boardwalk Pipeline Partners (BWP), as well as HighMount, an oil and gas exploration-and-production company. To top it all off, the company also owns and manages a chain of 17 hotels in the USs, as well as a hotel in Canada. Loews is a solid collection of asset managed by the Tisch family, which owns 15% of the company. The stock currently trades at just 88% of book value.

Fuel Systems Solutions (FSYS) is an intriguing company whose stock price has fallen to bargain levels. The company has seen results fall short as the conversion to natural-gas automobiles, trucks and busses has not moved forward as quickly as many had expected. The company makes alternative fuel-system technology and sells to 120 original equipment manufacturers (OEM) and delayed OEM customers, as well as 400 after-market distributors and dealers in 70 countries. It also has a division that provides alternative-fueled industrial vehicles such as industrial forklifts, sweepers, power generators and construction equipment. It is a market leader and I believe that at some point the U.S. will turn toward natural gas as a source of cheaper and cleaner energy. That process may take time to develop but this could become a growth stock leader when it does finally happen. In the meantime, the stock trades at just 75% of book value and insiders own 16% of the company.

The remaining three stocks will be familiar to longtime readers. Pericom Semiconductor (PSEM) trades at 80% of book value and insiders own 10% of the company. Alpha & Omega Semiconductor (AOSL) is an old favorite that still trades at just 65% of book value and insiders own 19% of the company. Hhgregg (HGG) is fetching just 81% of book and has insider ownership, while long-term holding Transworld Entertainment (TWMC) is at 66% of book value and insiders control 49% of the shares.

Like every other screen we have run this past week, the Schlossian screen finds a few bargain issues, but truly cheap stocks are still very thin on the ground.

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