Building the Waiting List

 | Dec 03, 2013 | 3:00 PM EST  | Comments
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Stock quotes in this article:

anr

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aci

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btu

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layn

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mdr

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bbry

In my search for cheap stocks, once I have surveyed the opening pages of Value Line, which cover stocks' median appreciation potential, and surveyed sectors to get a broad overview of the markets, I like to dive right into the tables in the back. Each week, Value Line posts lists of stocks that have high price-to-earnings ratios, low P/Es, highest yield and that sort of thing. Several of these lists, such as lowest price-to-book-value and highest projected total returns, have produced some very profitable ideas over the years, and I check them faithfully every week.

This week, I turned first to the list of stocks that trade at the widest discount to book value. The first two stocks listed are both in the shipping industry, a sector that I favor, and I already own several names in the space. Genco Shipping (GNK) and Eagle Bulk Shipping (EGLE) are both very cheap and trade for a fraction of book value, and I have been following them for over a year now. Unfortunately, they do not have the types of improving fundamentals or solid balance sheet that I favor. Both have severe credit issues, and there is simply no margin of safety to be found in the shares right now.

A coal stock makes the list as the third-cheapest stock in the research universe. Alpha Natural Resources (ANR) shares are trading at just 40% of tangible book value right now. So are shares of Arch Coal (ACI), while shares of Peabody Energy (BTU) make the list, trading at 110% of book value. Coal is a long-term recovery story, but as capacity is reduced and a turnaround in the global economy takes hold and pushes demand higher, these stocks should be huge winners. I own Arch Coal and plan to add to my position at some point. If Peabody trades back to 80% or less of book value in a market or sector decline, I would be a buyer.

Layne Christenson (LAYN) has sold off to the point that the stock trades at a very slight discount to stated book value. A closer check shows about $1.60 in intangible assets, so it is not quite yet cheap enough to buy. I have been waiting for some time to pick up shares of this stock, as the company has a very bright future over the next decade. Layne Christenson provides drilling and construction services to the energy and water markets, and that should be the focus on increased spending over the next 10 years. I need about another 10% decline in the shares to start buying the stock. If it breaks below $16, I will start looking at selling cash-secured puts at a $15 strike to back into shares of this one.

McDermott (MDR) also falls into that "Would you please just drop a little bit more?" classification. The stock currently trades at about 1.1x tangible book value, and the company has a bright long-term future. McDermott's focus on the offshore oil and gas industry could pay huge dividends in the long run, and recent missteps have pushed the stock down near real bargain levels. The balance sheet is solid with more cash than debt, so McDermott should be able to survive long enough to get the business back on track. This is another stock that might be a candidate for selling cash-secured puts if it declines little more.

BlackBerry (BBRY) makes the list of cheap stocks as well. The company has famously had its difficulties and has canceled a planned takeover deal. It intends to return to being a niche manufacturer of products for the enterprise markets, according to statements from the CEO. The hope is that the large enterprise and government markets will still find BlackBerry's products attractive and enable the company to survive for the long run. The executive tram was recently shaken up, as the CFO and COO were sent packing. The company still makes the most secure device, and businesses around the world may look at the device as a solution to data-snooping and NSA surveillance. At the current price, the stock's recovery potential is intriguing to me, and I will be doing some deeper investigation this week.

Right now, with the exception of the stocks I already own, the discount-to-book-value list is proving a waiting list and research opportunities, as opposed to "safe and cheap enough to buy right now" candidates. That is all part of the deep-value process, and the research done today helps me go into a decline with a list of candidates for long-term purchase.

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