Fusing Common Sense Investing Methods

 | Jul 16, 2013 | 1:00 PM EDT
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After publishing yesterday's column about my observations of what has and hasn't worked over the past 30 years, I thought it might be interesting and potentially profitable to try and combine the three methods of common sense investing to see if I could find some stocks that exhibited characteristics of all three approaches. I dialed up a stock screener to see what common sense stocks I could find that might be sensible long-term investments.

I searched for stocks that had a history of solid book value and dividend growth that also trade at reasonable valuations. Specifically, I looked for a decade of 10% average annual growth in book value and dividends that traded for less than 2x book value and 15x earnings. I worked the list down to those whose price-to-book value ration multiplied by the price-to-earnings ratio (P/E) was less than 22.5. I came up with a pretty short but interesting list of stocks worth consideration by long-term investors.

The highest yielding domestic stock on the list is, not surprisingly, a small bank. Smaller banks have partially recovered from the credit crisis but still face a lot of headwinds and are ignored by the larger institutional investors. First Bancorp (FNLC) is based in the booming metropolis of Damariscotta, Maine and is just your basic little community bank.

The bank has been around since 1864 and has 16 branches with $1.3 billion in assets. Over the past 10 years, its book value growth has averaged 10% annually while the dividend has grown by a little over 13% a year (on average). The price-to-earnings ratio (P/E) multiplied by the price-to-book ratio is just 15.6. So, while it's not as cheap as one of my typical picks, on a price-to-book basis, the shares are reasonably priced. At the current price, the stock yields 4.4%.

Small banks make up the bulk of the list, but at least one larger bank continues to make the combined common sense stock list. Capital One's (COF) revenues have declined along with mortgage and consumer loan portfolios. Losses from the credit card operations after the HSBC acquisition have also been problematic for the bank. However, the bank has one of best net interest margins in the industry due to its large credit card operations and should be in a position to grow fairly rapidly as the consumer recovers.

It has grown book value by 13% and the dividend by more than 15% over the past decade so it makes the growth cut of a common sense stock. The PE multiplied by the PB ratio is just 10, so the stock is very cheap at this price. The yield at today's price is just 1.8%, so it should be a leading dividend growth stock for the next decade as business and credit conditions improve.

Among the very few nonfinancial stocks on the list is the standout of Leucadia National (LUK). The company has made a very fine living over the years by buying companies no one else wants. By buying assets at depressed prices, the company has accumulated a collection of meat processing, biotechnology, gaming, energy and building products companies. Most recently it purchased the rest of the shares of brokerage firm Jeffries. The company also spun off shares of Crimson Wine Group (CWGL) to shareholders in the last year.

Its book value has been growing by 12% a year for the decade and its dividends have increased by 16% annually over that time. At 0.9%, the shares are not exactly a high yielder, but that should grow in the years ahead. The P/E multiplied by the price-to-book ratio is 10, so it is still a very cheap stock.

One of my favorite REITs makes the cut as well. A concern about lease renewal rates in its portfolio of lower Manhattan properties has kept a lid on the price of Brookfield Office Properties (BPO), but I think the fears are overblown. The company owns some of the premier properties in New York, Toronto and several other cities around the globe. It has grown book value by 11% annually and dividends by more than 15% over the past 10 years.

The stock has a very low valuation with a multiple of earnings and book ratios of just 6.7 but it trades at just 80% of tangible book value. You rarely get a chance to buy a portfolio of premier international properties at this price and it is one of my favorites buys right now. At the current price, the shares yield 3.3%.

Combining growth dividends and valuations has been a successful formula over the years and these stocks fit the bill.



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