Kicking Rocks and Screening Stocks

 | Jun 17, 2013 | 4:00 PM EDT  | Comments
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To taper or not to taper, this will be the question. It will also be the focus of just about every market-related conversation for the next few days.

Incredibly, billions of dollars will be bet over the next few days on where periods and commas are placed in the Fed statement, which is scheduled for Wednesday afternoon. Traders will be reading charts, tea leaves and everything else they can find to get some indication of what Ben and the boys will do. I will follow the news along with everyone else, but I am not going to fixate on this as the end-all and be-all of investing. This is going to be a very good week for me to wander around the corners of the market, kicking rocks.

I will start my rock-kicking stock search with one of my more successful screens. The perfect stock by my definition would be a profitable company that pays a dividend and sells for less than tangible book value. It would also have a solid balance sheet and own more than it owes and have no risk of default or bankruptcy. This screen has produced some fantastic stocks over the years, and is one of my staples for picking value stocks.

When I ran it this morning, I got a very short list of stocks. The criteria are pretty strict, so this screen never produces a long list, but I have only a dozen stocks that fit the bill, and all but three of them are nano-caps that are too small to mention here. That's the lowest return I think I have ever seen from this screen, as the rising market continues to deplete the inventory of cheap stocks. That is a warning flag but not necessarily a timing signal for the overall market.

Richardson Electronics (RELL) remains on the list of safe and cheap stocks, and it can still be bought at the current price. The company provides engineered solutions and distributes electronic components to the electron device markets. Its products and services are used in broadcasting communications, aviation, alternative energy, scientific industries and the military. The stock sells at 90% of tangible book value and just 125% of cash on the books. The company is profitable, and the shares currently yield a little over 2%. I think you can buy a little stock at the current levels and plan to buy more in a market decline. Should shares slip below $11, selling September and December puts with a $10 stock could be an attractive way to back into the shares.

Kimball International (KBALB) is an old friend that has returned to the list of cheap stocks. The price has improved in the past few weeks, but the stock still trades at just 80% of tangible book value. The company is seeing some improvement in its contract electronics manufacturing business while the furniture division is struggling a bit. The real damage in the furniture business was a double-digit decline in sales to the federal government, even as some other markets showed signs of firming.

The company had very little long-term debt and net cash of $89 million as of the end of the quarter, so the balance sheet is strong. At the current price, the yield is a little less than 2%. Kimball is profitable and should remain so and should even begin increasing revenue and earnings as the economic recovery gains traction. This is another stock where a pullback would have me looking at selling the July and October $10 strike puts as way to get paid to create a long position.

The last stock just barely makes the cut. Hecla Mining (HL) is still profitable and trades for just 90% of tangible book. It pays a very small dividend with a yield of 0.29%, so it makes the list. The company is primarily a silver miner, but it also produces zinc, lead and gold. Hecla acquired a third mine in the first quarter, and that will increase production levels, particularly of gold. Gold production should be 39% of the total for the rest of the year, with silver at 38% and the balance consisting of lead and zinc. I am not a precious-metals buyer, but the miners are getting very cheap. I already own Pan American Silver (PAAS), otherwise I would be a buyer of Hecla at this level.

I suspect we all be sick of the Fed by Wednesday afternoon. I have no idea what it will do and neither does anyone else. In the meantime, I am just going to keep looking for cheap stocks that can make me large returns over the next five years.

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