Focusing on Stocks, Not on the Fed

 | Jun 20, 2013 | 1:30 PM EDT  | Comments
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The Fed has spoken, and it seems there is a chance that it will reduce its bond-buying activities before the end of the year if the economy is stronger. I believe that is something of a long shot at this point, as my best guess is that the economy muddles along exactly as it has, in "better but not good" fashion.

Traders have seized on that possibility, however, and sent stocks and bonds lower since the press conference yesterday. The news out of China that its economy is slowing has not done much to cheer up anyone's mood today, and it looks like the selling will continue for at least part of the day.

I have diligently tried to ignore most of the noise and turmoil associated with the widely proclaimed, most important Fed day ever. The Fed's policies may make a difference over time, but for today they really do not affect me much one way or another as a value investor. If the central bank's monetary machinations create any serious changes in the markets, it will eventually show up in the price and value of individual stocks. If they cause a crash, there will be more cheap stocks to buy. In the unlikely event the man behind the fiscal curtain reignites the economy, it will show up in rising price-to-book valuations and give me a chance to sell at a profit. This may be a simplistic view of the markets, but over the past three decades it has been a highly accurate one.

As traders fretted all week, I have kept my head down and focused on individual stocks. I have run a series of screens to see which if any stocks are still cheap enough to buy. The bonus to this activity is that if the fear continues to creep into the stock market, these stocks can be bought at lower levels in the very near future.

Today I decided to combine my asset-based approach with the more private-equity-like enterprise-value-to-EBITDA approach and see if I could find any companies with both attributes. I loosened the price-to-book criteria a bit and am willing in this search to pay up to 1.25x asset value for companies that generate large amounts of cash.

One name at the top of the list is Calamos Asset Management (CLMS). The stock trades at 1.14x book value, but the company consistently generates large amounts of cash. Calamos is pretty generous with the cash as well. The stock yields 4.7%, and the company is buying back stock. Insiders have been consistent buyers of the shares as well. I have opened a position in this stock and would be a happy and willing buyer of more shares at lower prices.

Freightcar America (RAIL) is another intriguing candidate for long-term investors. The stock has been hit this year, as more than 90% of the railcar manufacturer's business comes from the production of coal cars. Coal has been cast in the worst possible light by the current administration, and production is down. Coal is not going away, however, and it will still be transported primarily by railcar. The stock is down 22% so far this year and is rapidly approaching bargain levels. The stock currently changes hands at just 1.13x tangible book value and has an EV/EBITDA ratio of just 3.93.

Unlike Freightcar America's major competitors, it has no long-term debt and plenty of cash on hand. The current market cap is $208 million, and it has $115 million of cash on the books right now. It would be less than a shock to see this company taken over by a larger competitor or major railroad company sometime in the next couple of years. I have not added the stock to my portfolio yet, but if the market continues to slide lower, I will be a buyer of this one. Railroads will stay in business, and they will continue to add to their fleet and replace older freight cars. The company may never be a growth darling, but it's worth more than the current quotation, in my opinion.

The market's response to the Fed is so far pretty negative. Long-term investors should resist the urge to get carried away, as we still are just now approaching 5% below the highs of the year. This is not exactly a crash or even a serious correction yet that creates widespread buying opportunities. Focus on what is cheap right now.

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