Bargains Below Book Value

 | Jul 10, 2014 | 3:00 PM EDT  | Comments
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Stock quotes in this article:

rjet

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skyw

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clf

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balt

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rell

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twmc

During the past week I have poked around the corners of the market looking for bargains worth buying. Using the classic 10 criteria and criteria for defensive investors developed by Ben Graham, I have searched for safe and cheap stocks worth buying in an overheated market. I did find a few bargains that are worth consideration, but all in all pickings were thin. Today I want to use some more updated tools to see if I can find some stocks that are safe and cheap, using updated methodologies.

The Piotroski F- Score has become one of my favorite stock picking tools since I first read Professor Joseph Piotroski's paper back in 2000. His paper showed that stocks with low price to book value and a high score on his nine-point model outperformed the market. Robert Novy-Marx's work confirmed that this was an effective approach and offered outperformance over time. I have used the fundamental and financial scoring tool with solid results for a long time, with outstanding results for the most part.

The criteria I used are very simple: I just looked for stocks trading below book value, with an F-score of 6 or more. We got a little longer list this time, with 86 stocks making the final cut. However, the focus was on smaller stocks once again, as just 34 of the stocks were over $100 million of market cap and 78 of the companies were below the $1 billion level.

Two of the smaller airlines made the grade. Republic Airways (RJET) and SkyWest (SKYW) both partner with the larger legacy carries to offer smaller aircraft regional services. They both have an F-score of 6, so business and financial conditions have been improving for both. Republic trades at 92% of book value, while contract problems have weighed on SkyWest and that stock trades around 50% of book value right now. Airlines have been holding their own during the very weak recovery, and these two have the potential to move a lot higher if the economy does, in fact, continue to improve.

One stock that at first glance is a surprise on the list is Cliff's Natural Resources (CLF). Business has been rough for the company, as excess supplies and weak demand of iron ore have hurt revenues and profits for some time now. Conditions have gotten so bad they find themselves under attack by activist investors who want to split the company up to unlock shareholder value. I took a look at the F-score and price movement over the past five years or so and found that the F-score was actually pretty predictive for this stock. Scores were low in 2009 as the stock crashed and then moved up in 2010 right before the stock went on a tear and tripled off the lows. Scores dropped and in 2011 were low enough to suggest selling the shares. Now they are once again showing that conditions may be on the verge of turning around and it may be worth buying the stock at 45% of book value.

Baltic Trading (BALT) shares have been weak in the past month and the stock is now trading at just 79% of book value. The Baltic Dry Index has fallen quite a bit this year, as the global economy continues to sputter. Baltic Trading has a fleet of 13 vessels carrying things like iron ore, coal, grain and steel around the globe. They operate in the spot markets, so they are impacted more when shipping rates are down, but will be among the first to benefit when they firm. The company earns a F-score of 6 and may be poised to reverse higher.

I find it very interesting that two stocks that are net current asset bargains also have F-scores indicating that they are poised to finally move higher. Both Richardson Electronics (RELL) and Trans World Entertainment (TWMC) trade for less than net current asset value. When super-cheap stocks start to see improvements in underlying business conditions, the rise in share price over the next year can be dramatic, so patient investors might want to consider owning these two classic bargain issues.

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