Buy Safe, Buy Cheap

 | Sep 27, 2011 | 12:30 PM EDT
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Listening to the early news this morning seemed very familiar. Listening to the various talking heads talk about the situation in Europe and the hope that they are finally making the moves to end the crisis gave me a strong sense of déjà vu.

After a minute, it occurred to me that I hear the same thing every spring. The Orioles tell us that they are going to add some strong young arms and bats on the corner and be competitive. They never are. I have heard new solutions and serious talk out of Europe regarding the sovereign debt situation for months now. It never works. I hope this time is different. I am long some European financials so it would be a huge boost for me if, in fact, this time they have the fix. But I have my doubts.

The stock market seems convinced, so far, in spite of signs that the political situation in Germany could derail some of the bailout plans.

In spite of the confusion and turmoil that dominate the economy and the markets, the basic job of a deep-value investor remains the same. Each day, when I sit in front of the screen, my first thought is to find cheap stocks that I can own for years and eventually sell for many times my purchase price.

When I run my screens lately I get long lists of stocks in the financial services and real estate industry. As the two are closely tied that is not a surprise and I have taken advantage of the cheap prices available in many of these stocks.

But today I want to look for some companies that are just in a basic business and fit the definition of safe and cheap. I looked for companies that trade at or below tangible book value, are profitable, have little debt and pay a dividend. I also wanted companies where management owns a significant amount of stock and are sitting on the same side of the table as shareholders.

Lawson Products (LAWS) distributes maintenance and repair supplies to industry, government agencies and commercial customers throughout the United States and Puerto Rico. Products offered by Lawson include hand tools, safety items, fasteners, welding and hydraulic products. In total they offer more than 300,000 products to their customers. In addition to a network of more than 1,300 salespeople, the company is developing an online presence to increase revenues and gain access to new customers and markets.

The stock is cheap. Lawson shares trade right at tangible book value and just 12x earnings. The company has no long-term debt and at the current quote the shares yield 3.4%. Insiders own more than 9% of the company. This is a basic business that should stay profitable in good times and bad, and could see strong revenue and profit growth when the economy begins to recover.

Spartan Motors (SPAR) makes chassis and bodies for the emergency vehicle, commercial truck, defense vehicles and RV markets. The company has struggled somewhat with slack demand, particularly form the key municipal markets, but that should change. The nation's fleet of fire trucks and emergency response vehicles is aging and many of them are going to need replacement in the near future. Spartan also has a 60% market share in step vans and that market will benefit from increased corporate spending.

The company has no long-term debt and trades right at tangible book value. At the current stock price the shares yield 2.24%. Insiders own a little more than 7% of the company. Although it is a value stock right now, Spartan will quickly become a leading growth stock when the economy spurs demand from commercial and municipal markets. I do not know when that this will happen, but I do know that at some point it will.

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