A Simple Screen for Killer Stocks

 | Jun 28, 2012 | 9:30 AM EDT
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Over the past few weeks I have played around with several new and different ways of looking at the market. I have researched setting up hedged portfolios, European indices, insider buying and even some unconventional yield approaches. All of this has been interesting and productive research, and some of it is will become part of my regular operations.

It is always a learning process, and even if an approach simply doesn't work or is too esoteric for regular use, it is educational. It is also true that I am just a geek who loves playing with numbers, statistics and reports. However, it is important to remember the basics of deep value investing. It is and always will be the core of my approach to the markets.

The core of the core approach is the set of investing techniques laid out by the late Walter Schloss. Schloss built a 50-year track record of market-slaughtering returns by focusing on safe and cheap companies. It worked for him, and it still works for me. Over the past couple of years, I have set up several tracking portfolios where I ran the screens for stocks that were trading below book value and had little debt and high inside ownership. I run this screen at least once a week, and every quarter I set up tracking portfolios of all stocks that meet the criteria. The safe, simple approach continues to kill the market with dramatically less volatility.

When I sit down to run the screen today, I find the same list of boring, basic stocks that are pretty much ignored by the market. The larger-cap names on the list are mostly insurance and reinsurance companies that have languished in the low-interest-rate environment and weak global economy. Research In Motion (RIMM) makes the list, but this is a stock that is so badly broken that it would need to trade below my liquidation estimate of roughly $4 a share before I would consider buying it.

AVX (AVX) is on the list after the recent decline in the share price. The company makes passive electronic components that store, filter and regulate electricity. A weak economy and rising material costs are pressuring its margins. There is some strength in selected markets for AVX products such as smartphones and most automotive markets, but the weakness in military and aerospace orders is hurting the near-term prospects. The stock currently trades at 90% of tangible book value, and it has more than 40% of the current capitalization in cash on the balance sheet. The stock is not very exciting right now. but it is safe and cheap and pays a decent dividend of 2.9%.

Consolidated Water (CWCO) is another old favorite that makes the list of safe, cheap stocks. The company owns desalinization plants and water distribution systems in several Caribbean locations including Belize, Cayman Islands and the British Virgin islands. The Caribbean is one of the fastest-growing markets for desalinization, and Consolidated should continue to grow along with the region. The area has small supplies of fresh water, so the company's products will see growing demand in the future. This is one of my favorite boring stocks -- it trades at 90% of tangible book value and yields 3.76 % at today's price.

This basic approach to stock-picking has worked for me for more than 20 years now. It is simple yet elegant, allowing me to find companies that are safe and cheap and whose managements are aligned with my interests. Keep in mind that screens are a starting place for the homework process. Make Mr. Market work for you and not against you by being a scale buyer on downturns in the overall market. It may be boring, but profits are exciting no matter how dull the source.

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