A Cornucopia of Possibilities

 | Nov 23, 2011 | 11:00 AM EST
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A handful of Real Money contributors, including yours truly, had some interesting conversations yesterday. Some of the usual banter about what appears cheap, or what names were getting hammered during the trading day, were temporarily replaced with "Do you deep fry your turkey?", "Have you ever had Turducken? (it's a boneless chicken stuffed into a boneless duck, stuffed into a turkey), and "What kind of stuffing are you having this year?" I learned that one particular member of the Real Money team, one whom you would never suspect, is quite the chef, and will be preparing all parts of the meal himself. What a menu his family will be enjoying this year! Who knew? This is yet another reminder that you can't judge a book by its cover.

But while I'm ignoring visions of the potato bread stuffing I'll be making tomorrow that are dancing through my head, I am on the hunt for some cheap companies. Today, I'm focusing on profitable names that are trading below tangible book value per share. The reason that I prefer tangible book over the more commonly reported book value is that the former excludes goodwill and other intangibles from the calculation. While intangible assets may have value in some situations, my presumption is that they are probably worthless in the type of names that I typically follow.

As usual, I'm excluding financials from my search, and utilizing the following search criteria:

  • Minimum market cap of $100 million
  • Long-term debt-to-equity of less than 50%
  • Profitable on a trailing 12-month basis
  • Price-to-tangible-book value below 1

Somewhat surprisingly, more than 60 names meet the criteria. Not surprisingly, I already own a handful of them, including Micron Technology (MU), Ingram Micro (IM), Omega Protein (OME) and Electro Scientific Industries (ESIO). That's a little heavy on the tech side for me, but all were cheap when I bought them, and still are, in my view, despite some challenges.

With "Black Friday" on the horizon, a couple of small retailers made the cut, including closeout retailer Tuesday Morning (TUES), a name I've owned previously, and one that also is a net/net (trades below net current asset value). Also, boating supplier West Marine (WMAR) has been doing surprisingly well in a difficult environment. West currently trades at just under 9x trailing earnings, .75x tangible book value per share, and is very close to net/net territory.

Among the bigger names making the grade are Valero Energy (VLO), which currently trades at 7x earnings and .71x tangible book, and Bunge (BG) at 9x earnings and .82x tangible book, Rowan (RDC) at 5.5x earnings and .93x tangible book, and Tesoro (TSO) at x earnings and .94x tangible book.

Among the smallest names are machine tool manufacturer Hardinge (HDNG), and the only restaurant that qualified, Luby's (LUB), a company that fell off my radar years ago, but one in which I will now dig deeper.



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