Others Can Partake in the Mad Scramble

 | Oct 29, 2013 | 3:30 PM EDT
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One of the questions I am often asked, especially after I pen the sort of columns I did last week -- which expressed incredulity about the current market levels -- is whether I am worried about missing out on gains if I am wrong and underinvested. It's a legitimate question because, as one reader pointed out, I am not great at selling. I am often wrong and always early in my selling endeavors. I am aware of this. It's the reason I will only use chicken shorts involving put spreads when I bet against overvalued stocks. I am highly allergic to margin calls, and if I outright short a stock, I am almost surely going to get one. The truth is that I don't worry about being underinvested, and that's because I'm not seeing many opportunities that fit my stringent asset-based value criteria.

When markets stage powerful rallies from overbought levels, my little safe-and-cheap stocks tend to outperform by an enormous margin. Big money is looking for cheap stocks to participate in the rally, and mine more than meet the test. Even the smallest of them will see institutional buying as money floods into the market looking for a home. This tends to create significant outperformance in safe and cheap stocks, and it more than offsets the high cash levels I am carrying.

If you look back over the past six months, the market has gained almost 15%. That's a huge return, and I would venture a guess that it is one of the very best six-month periods of all time. Now, let us consider what happened with my collection of safe and cheap stocks.

Back in April, I penned a column that suggested buying a package of stocks using a mechanical approach of picking stocks that traded at 90% or less of book value with low debt levels. An equally weighted package of those stocks is currently up about 69%. I could have been 80% in cash and matched the stock market's rate of return. But when a market shrinks the opportunity set to the level we have seen this year, that usually means it's a pretty strong market, and it eventually finds the safe and cheap stocks and pushes them into the momentum class.

Right now, when I run a similar screen looking for just your good old basic safe and cheap stocks, I do not find a lot of names -- and I am comfortable with that. I will take what the market gives at any given point, rather than try guessing at what might happen in the future. I do not feel the need to keep up the Joneses or the Buffetts or the indices. There are some interesting names on the list, and I am happy to own them at these levels regardless of where the overall market is.

Alpha and Omega Semiconductor (AOSL) is a stock I have mentioned several times in the past. The company is (obviously) in the semiconductor business for power management and control. It has huge exposure to markets that deal in such products as flat-screen televisions, laptops, tablets, DVD players and others that will see huge buying when we finally get a real consumer recovery. I do not know when that will happen, but I don't much care either. I am comfortable owning a company at 72% of tangible book value that has 5x as much cash as it does debt. I own the stock and would be willing to buy more at the current price.

Meanwhile, when I ran the screen this morning, a stock popped up that I haven't looked at too much lately. Baltic Trading (BALT) is in the hard-hit dry bulk shipping business. The stock has risen quite a bit this year as shipping has rallied from depressed levels, but it still fetches a little less than 50% of tangible book value. I have pretty good exposure to the shipping sector, but I will be taking a deeper look at this company. Baltic just completed a stock offering to expand its fleet, and is relatively unleveraged for a shipping company. If it passes my other tests, it could find a home in my portfolio pretty soon.

The silver miners are well-represented, with both Hecla Mining (HL) and Coeur Mines (CDE) showing up on the list. I have no idea when silver prices will improve, but I suspect they will do so over the next few years -- and, until then, I am content to own miners with strong balance sheets at large discounts from book value.

I will leave it to everyone else to figure out what the markets will do day to day or even month to month. Right now I cannot find a lot to buy, and I will not push the point in a mad scramble to maximize returns in the short turn. I will let value and the long run provide the returns I need -- and if this zero-interest-rate policy continues to power stocks higher, I am confident my safe and cheap stocks will more than keep up.

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