Tough Times for Value Hunters, Part 3

 | Jun 18, 2014 | 1:00 PM EDT  | Comments
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The first two parts of this series talked about the shrinking pool of stock ideas that can be purchased at a discount to future intrinsic value. Value and growth are two sides of the same coin, and Tuesday's comparison of Whole Foods (WFM) with Kroger (KR) illustrated why an asset that trades for a much higher price-to-earnings multiple can turn out to be a better "value" than an asset with a lower multiple.

Today, we are on the hunt for statistically cheap stocks, the kind of stocks that Ben Graham was fond of and Warren Buffett exploited in the formative years of his investing career. Devout Buffett students remember the famous story of Buffett poring through a thick Moody's manual back in the 1950s and finding insurance company Western Insurance Securities trading for less than 2x earnings!

Unfortunately, I don't have any stocks trading at 2x earnings, but for the statistically oriented investor, a gem of an insurance company in Florida called HCI Group (HCI) trades for 7x earnings and yields nearly 3%. Formerly known as Homeowner's Choice, the company is a property-and-casualty insurer providing homeowners insurance throughout Florida. Underwriting has been consistently profitable for many years. That success, however, has not gone unnoticed. Despite trading around $40, off from $53, the company is still being valued at more than 2x book value.

First Financial Northwest (FFNW) is a small community bank operating in the state of Washington. At about $11 per share, the bank has a market cap of $170 million and trades for 7x earnings. The dividend yield is 1.8%. FFNW is a small bank that trades for 90% of book value. 

Ballantyne Strong (BTN) is a $58 million Nebraska company undergoing somewhat of a transformation. It once focused on equipment and technology for cinema, but a recent acquisition also made BTN a provider of digital signage. Trading at about $4 per share, the company has no debt and nearly $2 per share in cash. Book value per share is $4.63. Clearly, BTN is hoping its new acquisition provides cash-flow growth. If so, the shares are dirt cheap.

There are morsels of statistically cheap names out there, but they can sit quietly for a long time if the income statement remains dormant.

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