Find Bulletproof Stocks

 | Sep 07, 2013 | 8:00 AM EDT  | Comments
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I have been pretty open about my caution concerning the current market. I won't rehash the case, but suffice it to say that I think there is a lot that can go wrong.

Consider that this bull run has some gray hair and has gone an unusual length of time without a pullback of 10%, or more. It also lacks new deep-value opportunities. Because of that, I believe a solid decline may be in order.

Of course, all market opinions -- including mine -- are somewhere between an opinion and an outright guess. They could very well be wrong. My track record at predicting market movements has been pretty spotty over the years, and there is usually a significant lag time between my bullish and bearish opinions and subsequent market reversals.

I won't be establishing any short positions, or selling stocks that are still undervalued based on asset value, as a result of my nervousness about the stock market. The worst feeling in the world is to be dead wrong about a top and to watch the market climb by another 10% or even 20%. Not only do you feel pretty stupid, but you miss out on quite a bit of potential profit.

But I can make sure my portfolio of stocks is as bulletproof as possible. I can do that by owning stocks that are safe and cheap with significant upside, but that have little chance or any erosion in the underlying business value. I cannot protect against market movements using a deep-value approach, but I can make sure I only own stocks for which I would be inclined to buy more at lower prices.

There a couple of ways to achieve this goal. The first is to limit my buying to stocks that are cheap, based on asset values, and which have strong credit ratings and improving fundamental characteristics. In order to help myself achieve this goal, I ran a screen that looks for stocks trading at a discount to tangible book value and sport high marks on both the Altman Z-score and the Piotroski F-score models.

I look for Z-scores above 3 and F-scores above 6 to find bulletproof stocks. This creates a list of stocks that are cheap; have solid balance sheets that afford little chance for financial distress; and whose core fundamentals are improving.

One stock that pops up is in the shipping industry, a sector in which I often feel like the lone bull. Aegean Marin Petroleum (ANW) is an international marine fuel logistics company that markets and physically supplies refined marine fuel and lubricants to ships in port and at sea. The company sells fuels and lubricants to customers across all major commercial shipping sectors and leading cruise lines in 20 locations around the world.

The stock got hit a little when it fell short of the always highly accurate analyst estimates, but its profit was basically flat on a year-over-year basis. It was the company's 10th consecutive quarterly profit -- which is impressive, given the global weakness in the economy in general and in shipping markets particularly.

The stock is cheap, trading at 90% of tangible book value, and it has an F-score of 6. That is in the lower range of positive scores, but it is my opinion that the stock is improved by the very healthy 5.7 Z-score, indicating a solid financial condition. When shipping picks up, as I think it will in 2014, Aegean is likely to sell more fuel to more ships and we should see a rise in the profits and stock price.

There are plenty of old favorites on the list, as well. Kimball International (KBALB) is a bulletproof stock, trading at 90% of tangible book with an F-score of 7 and Z-score of 4.33. Trans World Entertainment (TWMC) trades for less than bet current assets and has an F-score of 7 and Z of 3.94. Northwest Pipe (NWPX) trades right at book value and has an F-score of 7 and a Z-score of 3.24.

I can't predict the stock market, and I don't believe anyone can do so with much certainty. But, again, when I see a lot of reasons to be cautious, I find it best to locate bulletproof stocks. For such names, the value of the business should hold up well no matter what the share price does over the short to intermediate term.

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