The 'Too Cheap Not to Own' Club

 | Nov 20, 2012 | 3:00 PM EST
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I often talk about being conservative as prices rise in the market -- because research and experience have shown that buying in a rising market severely limits returns for long-term investors. Generally speaking, you are better off putting money to work during selloffs. As I've often mentioned, as well, about once a year we'll see a good market pullback of 10% to 15%, and every three years or so we get one of those good heart-bounding declines of 20% or more. By and large, those are the times when you should put your money to work.

Of course, aside from all this is my oft-cited notion of stepping up and buying those stocks that are too cheap not to own, regardless of market condition or prognostication.

This, of course, raises the question of what fits the bill today. The stock market has risen sharply since the bottom in 2009, and it's about due. The political and economic risks are rising now, as well, and there is now much talk about a possible crash or bear market in the press. What stocks fit the bill as being too cheap not to buy in a new portfolio, or not to hold in an established one?

The answer is: not many. But a few make the grade, and these are worth buying. Near the top of my list is Kelly Services (KELYA), the temporary employment and staffing company. Although the firm is seeing short-term weakness, given that hiring has been put on hold and layoffs are rising again in the post-election economy, its long-term prospects are bright. Jobs growth is sluggish, but it is growing, and much of that growth comprises temporary and part-time workers -- which plays to Kelly's strengths.

In addition, the stock is cheap enough, with the shares trading at just 76% of tangible book value. The company has no long-term debt, and has turned a profit every quarter since the end of 2009. It has a very high Altman Z-score of 4.9, as well as an F-score of 6, so it also passes the safety test. If Kelly shares were to go lower in a selloff, I would just use it as an opportunity to add to my position.

I also think the decline in Arbor Realty (ABR), after its October stock offering, has pushed the shares back to very cheap levels. Arbor trades at 75% of stated tangible book value -- and if you accept management's valuation, adjusted for swaps, the shares are at less than 50% of net asset value. I agree with management's assessment of the value, and think the shares are super cheap at this level.

I have written about Arbor a lot, so I will not rehash the whole case here. But I will point out that CEO Ivan Kaufmann has been a very active in his company's shares in the past few weeks. At this level, the stock is too cheap not to own, in my opinion. In addition to being inexpensive on an asset basis, the shares yield more than 8% at the current price. If I were putting a new portfolio together today, I would be a buyer -- and I plan to add to my current holdings on any weakness.

Finally, I now think shares of Zoltek (ZOLT) fall into this category, as well. The company makes carbon fibers for a wide range of industrial uses, but this company is primarily thought of as a wind-power play. It does get a large percentage of its revenue from wind-turbine manufacturers, and that business has slowed. However, Zoltek has growth opportunities in autos as that industry increases the usage of carbon fibers in the manufacturing process. The company has very little debt and solid credit scores, so it appears to be safe, in addition to being cheap.

Not too many stocks make the grade of being "too cheap not to own," and most of the ones that do have miniscule market capitalization. However, these three are large enough to discuss on Real Money, and I would be a buyer of them. As always, I only buy on down days, and I advise you not to chase them higher.

You will note that I did not mention any banks. That is a whole separate discussion, but I do view small banks as a very buyable opportunity right now.

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