Bargain-Hunting Amid the Wreckage

 | Sep 22, 2011 | 5:11 PM EDT
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The market action on Wednesday, and on Thursday morning, serve as a stark reminder of why scale buying works best for value investors. As I've said repeatedly, it appears to me that there are far too many risks in the economy and financial markets to justify piling into stocks. Europe's problems are continuing to spill over into our markets there appears to be no fix in sight. The Federal Reserve acknowledged yesterday that the economy is in poor shape, and that is weighing on stocks, as well.

In addition, the Fed's "Operation Twist" policy proposal is probably the worst thing that could happen to regional and community banks. It is not great news for the mortgage real estate investment trusts, either. I'll be evaluating where I want to add to stocks like Annaly Capital (NLY), Invesco Mortgage (IVR), KeyCorp (KEY) and Hudson City Bancorp (HCBK). The CBOE Volatility Index (VIX) is rising again, so I will run some options screens and see if there are opportunities to back into long positions in cheap stocks, as well. If I was "all in" I would be running for the door and evaluating my next career.

Staying small and moving slow allows me to view times like these as inventory-creation events, rather than occasions of wealth destruction. In addition to reviewing current holdings to see if I want to add to anything, I also want to see if any new opportunities have been created by the selling pressure. As the carnage dripped out of the quote screen this morning, I ran a few screens to see if any new inventory was worth further investigation.

I ran my basic Graham analysis first. This is a screen for companies that have been able to grow sales and earnings over the past five years, have low debt levels and are cheap on earnings and asset values. The measure of cheapness is one developed by Ben Graham and has worked very well for me over the years. The price-to-earnings ratio, multiplied by the price-to-book value, must equal 22 or less for the stock to be considered as a buy. The company also has to pay a dividend.

After a nice run last year share, shares of DDi (DDIC) -- a printed circuit board manufacturer -- pulled back into bargain territory. This stock was first bought to my attention by the mangers of the Adirondack Small Cap Fund right before it doubled, but it has since fallen by almost 40% from its highs. Multiplying the P/E ratio by P/B gets us a total of just 11, so the stock qualifies as a potential bargain issue. At the current price, the dividend yield is 5.6%. Insiders apparently like the price and the prospects, as they have been buying stock in the open market in recent weeks.

Another issue that has fallen to bargain levels, and is seeing strong insider buying, is Provident New York Bancorp (PBNY). The bank certainly qualifies as cheap, as its Graham measurement comes to less than 12. The stock currently yields 4.03%. The bank has been taking measures to reduce its cost base, and has identified about $10 million of annual savings through cost controls and personnel layoffs. Nonperforming assets are less than 2% of total assets, and the tangible equity-to-asset ratio is an acceptable 9.37%. Bank stocks are going to feel some pressure as a result of the Fed's twist operations, but this stock is a good candidate for your list of Trade of the Decade bank stocks.

Keep in mind that, when I run screens, I am just building lists of research candidates. I am not in a hurry to run out and increase my equity exposure just yet. There is way too much happy chatter from television and around Wall Street for me to think the worst is over.



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