Hunting for 'Triple Six' Prospects

 | Jul 28, 2011 | 9:15 AM EDT
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I'm really trying to avoid most of the news right now and have used the mute button generously during the day -- I am just sick of seeing politicians on the financial channels. I love politics and I watch election results like other people watch the Super Bowl. However, the fact that politics has dominated the markets during the past few years is frankly tiring.

While politics and decisions out of Washington, Bonn and London have always had some impact on stock prices, I do not recall a time when it was such a large factor as it is now. I have tried to focus on the discipline of asset-based, deep-value investing and ignore the talking heads, commentators and speechifiers who are dominating the news channels. I pressed mute, dove into my stock screens and followed up the research to the best of my ability.

Today, I ran my "triple six" screen, which has been one of my most successful screens over the years. Originally developed by Chris Browne and John Spears at Tweedy Browne, the screen looks for very cheap stocks on an earnings and asset basis that have high dividend yields. Except after market crashes, the screen does not produce a lot of names, and those that do turn up are the cheapest of the cheap.

Often, they are on the verge of being distressed stocks, but with a little careful selection it has been a very profitable screen. This time I came up with exactly zero names of operating companies in the U.S. stock market. Many closed-end funds and mortgage REITs appeared, but in this screen I want to find real companies or equity REITs that actually own the properties.

However, I did get a stock that was very close to qualifying. Leaf tobacco merchant and processor Universal Corporation (UVV) comes very close to meeting all of the criteria. The stock trades at 80% of tangible book value and has a price-to-earnings (P/E) ratio of 6.7x. At the current price, the dividend yield of the stock is 5.24%. Two large processing contracts for the company recently expired and they are not likely to be renewed. As a result, Universal will likely see business decline substantially in 2011.

Cigarette sales have been weak in key markets, and, as a result, many manufactures have an adequate inventory of leaf tobacco, which could also hurt results. I can easily see UVV falling to the point it has a 6 handle on the yield and P/E ratio, and a price-to-book ratio below 0.7. When it does, it will be a bona-fide "triple six" stock and should be bought. This is the only U.S. "triple six" candidate. After that we have to set our sights overseas.

ncerns about the global economy and its effect on air travel have weighed on shares of FLY Leasing (FLY), and the stock is close to being a "triple six" stock again. This Ireland-based company first made the list in 2008, and recovered very nicely off the lows. Now, it has pulled back to the point the shares trade at 90% of tangible book value and has a P/E ratio of 9x. Currently, the dividend yield is 6.44%. In spite of market concerns, the company is still performing well and generating cash. As it has in the past, the company continues to buy back stock as well as repurchase debt at substantial discounts to face value. If macroeconomic concerns continue to push the shares lower, it will be a legitimate "triple six" stock once again.

If I relax the criteria slightly and allow for a P/E based on forward earnings, I get one other "triple six" portfolio candidate: Old Republic International (ORI) shows a loss for the past year, but is expected to be profitable for the rest of the year. The insurance company offers title insurance, mortgage insurance and general lines.

The mortgage and consumer credit insurance lines have suffered losses in the past year as a result of foreclosures and credit delinquencies. Right now, the stock trades at 70% of tangible book value and yields 6.46%. Losses should be beginning to subside, and the company is expected to show a profit for this year and next. As the real estate markets stabilize in the future, the company should turn out reliable annual profits once again. It is unlikely the dividend will be reduced, so it is a reliable income stock in the interim.

This is about as thin a return from the "triple six" screen as I can recall seeing in some time. No stocks actually meet the screen criteria, but these three will be worth buying if they continue to decline over the next few months.

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