Kicking Rocks in Search of Value

 | Apr 19, 2013 | 4:00 PM EDT
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Although the lack of new cheap stocks is disconcerting to say the least, I keep walking around the markets, kicking over rocks and exposing dark corners in an attempt to find gems that are worth consideration.

My basic screens focus on asset value and creditworthiness for the most part, but I run several other screens to find cheap stocks and worthy long-shots that might escape my rather rigid filters. I look at free cash flow, insider activity, debt rating changes and many other factors to uncover opportunities. I do not always find them, but the occasional winning stock makes all the rock-kicking and investigation worth the effort.

Lately, some stocks are showing up in multiple screens, and they appear to be worth further investigation. One such is Calamos Asset Management (CLMS). The stock is trading at 1.2x tangible book value and has not yet fallen into my classic value screens. However, it has shown up on free cash-flow screens and insider-activity screens, so the asset-management company may be worthy of serious consideration or at least worthy of being added to our "watch and buy later" list.

Insider buying at the company has been relentless the past few months. CEO John Calamos has been a consistent buyer of the stock at around current prices. He has been joined by several other officers and directors of the company. In all, insiders have snapped up more than 220,000 shares recently. The stock qualifies as a buy under both the top-executive and cluster-buying approaches to insider trading systems.

John Calamos was one the innovators of convertible bond and convertible arbitrage trading. When I culled my library before moving south, his Convertible Securities was one of the 50 or so books that made the cut as a keeper. In 1975, he offered one of the first convertible securities funds for individual investors. Since then, the company has grown into an international asset management firm that has $29 billion in assets across a wide range of styles and asset classes.

Although the stock is not truly cheap on a book-value basis, there is a lot going on here. Calamos Asset Management consistently generates huge free cash flow, and the stock trades right now at less than 2x free cash flow. The firm has generated more than $100 million in free cash flow for years, yet the market cap is just $227 million. The company is using the money to buy back stock and pay shareholder dividends. Net of cash, the enterprise value of the company is negative, and net cash of more than $400 million exceeds the company's market cap. The stock may not show up on usual screens, but the shares are very cheap on many metrics and pay a generous 4.5% yield.

Benchmark Electronics (BHE) is another company that has shown up in my screens in recent weeks. Unlike Calamos, Benchmark is a book-value bargain, trading at just 80% of tangible book value. The stock also sells at a very small premium to net current asset value. The stock also sells at an enterprise-value-to-EBITDA ratio of just 4.8, so it pops up on what I call my private-equity replication screen as well. The company provides contract engineering and manufacturing services to several industries, including electronics, medical devices and telecommunication equipment.

The stock is cheap, but there is not a lot exciting going on here. Sales and profit growth are relatively flat, and several of the company's customers will feel a negative effect from the federal government's sequestration. The telecom business will continue to be a drag, but it does a lot of work for IBM (IBM), and that company's continued expansion into cloud computing and other growth areas could provide opportunities for Benchmark to see revenue and profit growth.

The medical-device manufacturing business is also starting to show some strength, and that is expected to continue for many years. Benchmark has plenty of cash on hand and has been buying back stock for several years now. I am a huge fan of boring, profitable companies with lots of cash trading below book value and generating free cash flow. I will be buying this stock in the very near future.

My rock-kicking and corner-exploration trips around the market do not always pay off, but sometimes I uncover gems that are worth considering for a long-term value portfolio. Both of these names are cheap enough on many metrics to deserve consideration.



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