Staying Focused on Value and Dividends

 | Oct 15, 2013 | 2:30 PM EDT
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I am trying my best to continue to resist the news out of Washington, D.C. Many people are hoping today that the Senate passes a deal, but even if it does, the bill then has to go over to the House, where passage is not a foregone conclusion.

The craziness is totally overshadowing earnings releases and other news. Ordinarily, we would be obsessing over every little line item in the Citigroup (C) report and discussing the very average revenue growth out of Johnson & Johnson (JNJ). Perhaps we would be obsessing over the dramatic fall in the Empire State Manufacturing Index released this morning. Instead, we are focusing on Capitol Hill and the ongoing attempts to kick the can past Christmas. It seems that while we are all in favor of fixing the budget and responsible government, neither side wants to play the role of Scrooge in this year's production.

I am just keeping my head down and wandering around the market looking for ideas. Today I fired up my trusty screener and went looking for stocks that trade below book value, pay a decent dividend and have a Piotroski F-score in the upper half of the stock universe. The discount from book value ensures that we are buying cheap stocks, and the strong F-score tells us that business is getting better and that there is a good chance the stock will outperform over the next year, regardless of the political circus.

There are some interesting names on the very short list of dividend-paying cheap stocks that have strong upside. International Shipholding (ISH) continues to march higher, but the stock is still trading at just 82% of book value and yields 3.8% at the current price. The stock has had a really strong run, so I might wait for a pullback in the shares, but business is improving rapidly, and the company earns an F-score of 7. The company owns 50 ocean-going vessels, including several that are flagged under the Jones Act and can ship from one domestic port to another. Business is getting better, as evidenced by last quarter's 70% year-over-year increase in earnings.

Cedar Realty (CDR) is another old favorite that continues to make the grade. The company owns shopping centers in the Washington-to-Boston corridor of the East Coast, most of them local centers anchored by a grocery store tenant. Cedar has fared better than many other shopping center real estate investment trusts. The company has been selling properties it considers noncore operations and also registered a market offering of 10 million shares to help continue to reposition the portfolio and pay down debt. The property portfolio is more than 92% leased right now, and new leases have shown strong price increases. The shares trade right at book value, and the current yield is 3.72%. The improving business conditions earn the company an F-score of 7, which is predictive of strong stock price performance over the next few years.

Arbor Realty (ABR) is another old friend that is back on the list of potential dividend-paying cheap stock winners. It also just did a stock offering recently of 6 million shares that is weighing on the stock. Arbor invests in real-estate-related bridge and mezzanine loans, preferred and direct equity investments and mortgage-related securities, and results have been solid since the end of the credit crisis. Arbor raised its dividend last quarter by 8%, and the shares now yield 7.81%. The stock fetches about 88% of stated book value, although management claims that the adjusted non-GAAP book value is actually $9.63. The improving business conditions have earned the company an F-score of 7, and the stock appears well positioned for solid long-term returns.

The goofiness in Washington will go on until it is over. Since the House is now rushing to come up with a competing bill to the one being pushed by the Senate, the situation is still far from certain. Many people are saying there will be a last-minute deal to avoid a debt default, but it's anybody's guess at this point. I am not in any rush to buy stocks here, as we haven't really sold off very much, and we are still less than 2% below the high for the year.

I am spending my time compiling lists of stocks that are cheap and appear to have significant upside while providing a nice stream of dividend income. This seems much more productive than trying to predict what the politicians will come up with to save the Republic and win re-election. If this scares the markets enough, we can put money to work in these names at great prices.

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