Of Congress and Curveballs

 | Oct 10, 2013 | 1:30 PM EDT  | Comments
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Stock quotes in this article:

cde

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paas

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rds.a

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hts

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two

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amtg

If you are like me, you are tired of Washington D.C. dominating the stock market. The market is being held hostage by 535 people whose only real skill in life seems to be the ability to fool enough people into voting for them to gain job security. I try not to think about the fact that our budget and debt limitations are being debated by a group of folks that I probably would not hire to cut my lawn. While it is nice to see stocks higher today, it is ridiculous that the market is up just because a bunch of disagreeable people have decided to get together and talk about fixing the problems they created.

To escape the macro madness, I flipped the TV to the MLB Network and listened to playoff coverage instead of D.C. silliness while I ran screens to find bargains. The first screen looks for stocks that trade below book value and are within a few percentage points of a new 52-week low. In spite of the breathless predictions of catastrophe that have dominated financial media of late, the stock market is still just a few percentage points off a 52-week high, so the list is not particularly long.

The miners continue to be hated by the stock market. Silver and gold have been bouncing around the lows for a few months, so I am not surprised that the miners are doing the same. It is tough to make money when your costs remain fixed and the price of your product is pushed down by market forces. I have no strong opinion on metals prices and really cannot tell you where they will go over the next few weeks, month or years. But I can tell you that the miners have value as a business, and companies such as Coeur Mines (CDE) and Pan American Silver (PAAS) appear to be trading well below that level. Silver Standard Resources (SSRI) appears to be trading below the level of cash on the books. I would hold off until the Nov. 5 earnings report to see how much cash it burned in the three months, but the stock looks very cheap based on asset value.

The largest company on the list is Royal Dutch Shell (RDS.A). The oil-and-gas giant has not been able to do much right the past few years and production has been in decline for eight straight years. It has taken a bath on its U.S. unconventional gas assets, and its Nigerian operations have been best described by analysts as troublesome. Management is trying to dispose of these assets and refocus on basics. The company has significant downstream assets with more than 40 refineries, and it is a leading retailer of petroleum products globally. Shell will continue to experience problems in the short run, but the stock has a lot of value and at 50% of tangible book value, it does not appear to be reflected in the stock price. As a bonus, the stock yields a comfortable 4.7% at the current quote.

My list is littered with mortgage real estate investment trusts. I like the space in the very long term, but the short term carries enormous risks. No one I have talked to is exactly sure of how stocks like Hatteras Financial (HTS), Two Harbors (TWO) and Apollo Residential Mortgage (AMTG) are going to react to the rapidly changing interest rate and housing markets. A taper of bonds purchases by the Fed could cause additional pain to asset values in the sector. I am intrigued by comments by Apollo that it changed its mortgage book to eliminate rate risk in favor of credit risk. I need to do a little digging into the premise, but if it has accomplished that daunting feat, then at 80% of tangible asset value and sorting an 11% yield I could be comfortable as I believe credit risk in housing has declined substantially in the past few years.

Kicking over rocks in the stock market is a far more productive use of my time than listening to the foolishness spilling out of our nation's capital. I am far more interested in finding cheap stocks and seeing how Justin Verlander pitches for the Detroit Tigers tonight than what curveballs the two parties are throwing at the American public.

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