Specific Stocks for a Frightening Market

 | Jul 31, 2013 | 3:00 PM EDT
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It didn't take long for the questions to start after yesterday's column was published. Many people wanted to know if I am really that concerned about the market. Of course I am. If you are not, then you are not looking deeply enough. The market and the economy have some structural problems that could be disastrous. I hope that disaster never happens, but I intend to be prepared if the cracks expand.

The next question, of course, is exactly which stocks I was buying to get 35% invested in this market. I would be less than fair if I didn't answer that question, so I will highlight the stocks I would buy today with new money.

First, let's understand that this is a new-money portfolio. The fact that a stock I bought last year is not in it does not mean you should sell it. It just means it has moved up enough that I am not putting any new money in the stock. Feel free to email me with questions on any particular stocks I have suggested that are not listed here.

Second, this is a domestic, non-bank portfolio invested on strict asset-based criteria. There are no longshots, foreign maximum-pessimism stocks or small banks in this portfolio, nor are there any of the Graham growth-type stocks I occasionally suggest for younger investors such as my kids. This is a classic Tim Portfolio. Also, be aware that most of these stocks are tiny, so I am only going to be able to cover those that are large enough and liquid enough to discuss here.

I have talked a lot about Richardson Electronics (RELL), and it definitely goes into a new portfolio. The stock trades right around the value of its net current assets. The company is not setting the world on fire by any stretch of the imagination, but it is profitable and pays a 2% dividend. Business is just going to slog along until we see a stronger global economy. The stock is trading at 90% of tangible book value, and the company has more than 80% of the share price in cash.

Alpha and Omega Semiconductor (AOSL) is struggling along with the economy as well. The company makes chips used in batteries, smartphones, computers and gaming systems. The shares fetch just 70% of tangible book value, and this company also has more than half of the share price in cash. The company has done a solid job of increasing shareholder equity over the past few years and should see strong results in a better economic backdrop.

I included all the resource and mining stocks we have talked about in the past few months. If we ever do have an economic recovery, and I am confident that at some point in the next few years that we will, then we will need the companies that dig stuff out of the ground and provide the basic materials. I include Resolute Forest Products (RFP), Pan American Silver (PAAS), Cliffs Natural Resources (CLF) and Arcelor Mittal (MT) in the group.

While some of those are foreign, they are not part of a maximum-pessimism trade such as I have suggested in Brazil and European banks. All of them are very cheap on a price-to-tangible-book-value basis. I am aware that if the economy does collapse, so will these stocks, but I am more than willing to buy more at a deeper discount.

I still like Brookfield Properties (BPO) as well. It is rare to be able to pay a portfolio of global world-class real estate at this type of valuation, and I feel that this could be a huge winner for over time. The market is too focused on the space that Brookfield has to lease in Lower Manhattan and is not looking at the quality of the portfolio of premier office space around the world.

In spite of the space available in New York, the overall portfolio is 91% leased, and Brookfield is renewing many of its leases at higher rates. Trading at 70% of tangible book value, this REIT is too cheap not to own, in my opinion. The company should close on its acquisition of MPG Office Trust in this quarter, giving it a nice chunk of the Los Angeles skyline at a very good price.

I will conclude this portfolio wrap-up tomorrow. Even in a market that has serious long-term concerns, some stocks are just too cheap not to own. The key to making this all work is that I have a very long time frame and have no problem buying any of these stocks down 50% from the current price in a market pullback, decline or crash.

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