Snapping Up the Cheapest of the Cheap

 | Jun 28, 2013 | 4:00 PM EDT  | Comments
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Stock quotes in this article:

pva

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sfy

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nwli

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gnw

Today begins that annual adventure that my wife calls vacation. As near as I have been able to determine, vacation is a process that involves me packing up my computer and research materials and moving them to another relocation inn a town with a beach. There is also a clause in our vacation policy that includes additional family and friends hanging around to irritate and interrupt me during the day. This year is New Smyrna Beach -- at least I will have an ocean view while I am working. Before I head off on this joyous occasion, I spent some time today searching for the very cheapest stocks in today's market.

Even if I am not that fond of a particular business, I have found that is very important to own the very cheapest stocks that do not appear to be headed for liquidation or failure. These names often end up providing a significant percentage of returns on an annual basis -- even when they don't have a great story to attract buyers. Most of the time they just hang around at low prices until some event or news sends them hopping higher very quickly.

Penn Virginia (PVA) is a classic example of such a stock right now. I am really not a big fan of the management at this company. They have missed several opportunities to maximize shareholder value, leveraged up the balance sheet and sold stock well below book value. The positive is that they won some own some assets with huge upside potential in the Eagle Ford basin and the stock is ridiculously cheap at less than 40% of tangible book value. They have been about to increase oil production and that should be 70% of the output next year. Hopefully they sell some assets during the next 12 months and use the cash to reduce debt levels. I would not have a huge position in the stock but I do have a small one. If things work out over the next few years the stock could easily triple or more.

Including right now, I have owned National Western Life Insurance (NWLI) several times during my career. The company underwrites a lot of interest sensitive business, such as universal life insurance and retirement annuities. So with yields at current levels, this is not the best of businesses. The share structure gives the chairman control of the company, so shareholders do not have much a say -- I suspect this is the only reason this company has not been taken over before now. The company has done a solid job of managing the business in difficult times and, at 40% of book value, the weak business environment is not that big a factor. The stock is safe and cheap enough to buy.

Swift Energy (SFY) is not making the transition to oil and natural gas liquids as quickly as the marketplace might have hoped, and the stock has been punished. The company is continuing to transition for a shallow water driller in Texas and Louisiana to an unconventional oil and gas driller. Although it may take longer than some expected, I think it will be successful in the long run. If I am correct, the shares will trade from their current level of 50% of tangible book value to a substantial premium-to-book value. The early results from Eagle Ford are positive and the company should be able to increase its oil and liquids production over the next few years.

To my discredit, I never pulled the trigger on shares of Genworth Financial (GNW) and the stock has almost tripled over the past year. Incredibly it is still cheap as it recovers from deep financial distress. The mortgage insurance business almost put these guys out of business but conditions are improving. They have placed several lines of business, including variable annuities and Medicare supplements, into run off. The long-term care business is seeing strong results as the population ages and even the mortgage insurance business is showing signs of a recovery. In spite of the strong stock price performance, the shares still fetch just 40% of tangible book value. I am not going to chase the stock just yet, but if we get a broad market pullback, I will buy Genworth.

There are not a lot of cheap stocks around right now, but history tells me that I need to own the ones I can find.

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