Seek Out the Cheap and Unloved

 | Jul 02, 2012 | 3:00 PM EDT
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After an adventurous move from Maryland to Florida, I am finally ensconced in my office with palm trees in my yard. One of the more interesting occurrences when moving is that sometimes you find things you did not know you still had. I opened a briefcase and found an old edition of the Astute Investor Statistical Service. The service gave little commentary and contained just lists of stocks that traded below book value and had high earnings yields. One section called book16s was a list of stocks trading below book value with an earning yield over 16%.

This edition was from June of 2009 -- just after the market had bottomed and was beginning its spectacular climb up a wall of monetary stimulus. While I know most stocks have risen since then, the ones on this list have done so in a spectacular fashion. Among the first 10 names are two 10-baggers and a triple. The list of book 16s has little banks, aircraft leasing companies, REITS and other companies that have recovered amazingly well.

Fortunately, this is a very easy screen to replicate. I ran it this morning and although there are far fewer names than the dark days of 2009, there are still some very interesting names on here. Energy is well represented on the list of cheap profitable stocks. Patterson-UTI Energy (PTEN) is now trading at 90% of book value and trades at a PE ratio of just 6.5. The land-based contract driller has had the same issues with low natural gas, and now falling oil prices, as every other driller in the U.S. Patterson actually saw its rig count increase in the first quarter and that should continue to rise as drilling activity begins to increase in the Bakken and West Texas fields, which have higher oil content. It also has the largest rig fleet in the Permian Basin and should see huge revenue and profit increases there when natural gas and liquids recover over the next few years. I have owned this stock and its pre-merger components several times during my career. When it gets to 80% of tangible book during the coming weeks, I will consider it too cheap not to own and be a buyer.

Another old favorite on the new list of cheap stocks with high earnings yields is  Kelly Services (KELYA), which has seen its stock drift back downward this year as fears of a recession darkened the outlook for staffing and employment companies. Trading at 80% of tangible book and less than 7x earnings, I think the stock is too cheap not to own. Within an hour or so of publication I will be adding a little to my existing position in the stock. Kelly has been profitable since 2009 and is going to benefit from employers' caution. Adding temporary help is cheaper than permanent staffing and the company has seen revenues tick up in the US as employers take advantage of this. When the economy fully recovers the reorganization and cost cutting done during the recession should provide huge benefits to the company and the stock looks far too cheap to me at this level.

The discovery and review of the old stock lists tells us two things. One is that buying cheap stocks and holding them for several years works. Two is that buying cheap stocks after the market has dropped and stocks are universally feared and hated works spectacularly well. Right now, energy and human resources stocks are cheap and unloved. That sounds like exactly the right time to be a buyer to me.

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