Markets Foiled by Political Uncertainty

 | Oct 14, 2013 | 2:00 PM EDT
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I guess this will be another week totally dominated by the news coming out of Washington.

Unless we get an end to this political foolishness, markets are going to move based on who was seen walking down the corridors of power with whom. And which talking head claims to have the inside track on the Capital Hill festivities. It is enough to make us miss the old days when whisper numbers and projected results dominated the earnings season discussions. They seem almost rational compared to the market we have today.

The hard part is to keep your head down and ignore the noise until it either drives prices to ridiculous levels or creates inventory by selling off. I have seen some discussions on the best way to trade the shutdown and political impasses that can only be described as ludicrous. It is impossible to know what Congress will do, how the President will respond and what the markets will do in the aftermath. Trading in this manner is worse than gambling, as the odds are unknowable and there are no pretty girls bringing you free drinks.

I have focused on keeping my head down and resisting the urge to do much of anything in response to the latest round of news. I have been running screens and reading 10Qs on interesting companies as they are released. I have been worrying a lot more about the Tigers' bullpen than John Boehner's schedule for the day.

This morning I ran a screen that looked for stocks with some bulletproof characteristics that are getting cheap enough to consider. I looked for stocks trading below book value that were profitable and paid dividends. To keep everyone's interests aligned, I also looked for a high level of insider ownership.

There are some old friends on the list. I have owned shares of California First National Bancorp (CFNB) for some time in conservative accounts and the stock has rewarded with a strong income stream and has moved up a bit as well. The bank is heavily engaged on the capital equipment leasing business. The bank takes in deposits via the internet and phone and only has one office. Its primary business is the commercial leasing part of the company.

Operating results can be volatile quarter to quarter and in a weak economy results have been basically flat for several years now. They pay out the lion's share of profits as a dividend and right now the stock is trading just below book value and yielding over 12%. I wouldn't bank on the payout staying at exactly this level but over time you should see a much higher than average from this stock. Insiders own more than 80% of the stock so their interests are going to be in line with yours when it comes to the stock price and dividend payout.

I have also owned share of Fly Leasing (FLY) for a long time and intend to do so for a long time to come. The company did a fairly large stock offering back in June that lowered the total book value of the stock to around $18.50 or so but the stock is still trading at just 75% of tangible book value. They are expanding the fleet and just took delivery of a new Boeing 787 Dreamliner. The plane was purchased as part of a sale leaseback with a Latin American airline so the plane is already on lease. At todays price the shares yield right at 5%. Insiders currently own about 11% of the stock.

Kansas City Life (KCLI) remains one of my favorite "bore me to the bank" stocks. The company sells life insurance and annuities as well as group insurance products. They focus on the life end of the business and results have been decent in spite of the low interest rate environment that impacts their Universal Life products. The company has been around since 1895 and is conservatively managed both in its practices and investment portfolio. The stock is trading at about 70% of book value and yield 2.38%. Insiders own almost 70% of the stock, so they have an interest in higher stock prices and dividend increases going forward.

I have little to no way of knowing what happens in D.C., or how the markets will react to it. I can look for stocks that are cheap on asset basis, that have decent dividend yields and in which management has a vested interest in the performance of the stock.  Once I have a list of these stocks, I can use the politically-inspired portfolio to work for me and buy them at bargain levels for the long term.

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