The Cheapest of the Cheap

 | Dec 20, 2011 | 11:47 AM EST  | Comments
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Stock quotes in this article:

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gfa

I can tell that it is almost Christmas time, as I have collected my usual array of wrapping paper cuts, shopping cart bruises and decoration-related injuries. I am a natural-born klutz and, every year, as we move closer to the big day, I start looking like a crash-test dummy ready for triage. My daughter is fond of telling me I make the star of Bob Rivers' "The 12 Pains of Christmas" look like an underachiever. Regardless, I have put in some work this week, looking for stocks that might be gifts for readers -- as well as for myself.

More specifically, I am running some screens looking for stocks that fit the definition of "very cheap." A lot of so-called value investors look for stocks that are historically cheap or comparatively cheap. This week, I'm seeking those that are absolutely cheap and offer substantial upside while maintaining a margin of safety. The first screen I ran today looked for stocks trading below 70% of their tangible book value and have margins of safety in earnings, cash flow and regular dividends for shareholders.

One of these stocks is in a group on which I have been focusing in recent weeks: the hotel business, my favorite subsector of the commercial real estate market. Chatham Lodging Trust (CLDT) own 18 hotels outright, and it has a minority interest in a joint venture that owns an additional 64 hotel properties. (The joint-venture partner is Cerberus Capital Management, the distressed and private equity hedge fund.)

Chatham shows an accounting loss, but it's coming in positive on funds from operations and on earnings before interest, taxes, depreciation and amortization -- both figures are growing on a year-over-year basis. The company has been buying hotels during recent months, taking advantage of low pricing for mid-level properties. The stock, priced at 60% of tangible book value, is very cheap. At the current price, the shares yield 6.74%, so investors get paid to wait for conditions in the economy to improve, which would lift the hotel business.

Another stock on the list is one I have been watching all year, as readers first started suggesting I look at Gafisa (GFA) when the shares fell below $10 earlier in 2011. The Brazilian homebuilder was a Wall Street darling during the craze over BRIC -- that is, Brazil, Russia, India and China -- but has fallen off amid the slowing economy. I avoid homebuilding stocks, whether global and domestic, until it looks like the world is ending and they're trading at half of book value. Gafisa is now at that level.

In addition, though building activity has slowed in Brazil due to global economic travails, it is likely to regain its former robust pace. That's because interest rates are coming down in Brazil, and the company is looking forward to the 2014 World Cup and the 2016 Olympics in Rio de Janeiro. The middle class is continuing to grow in Brazil, as well, and that will continue spurring demand for housing as the global economy picks up steam in the future.

Eventually the mess in Europe and here in the U.S. will behind us, and Brazil could well be a growth darling once again. At 50% of tangible book value and a dividend yield above 3%, Gafisa is worth considering for long-term investors. It will be a bumpy ride, as is the case for most of my picks, but this stock could easily approach its old highs over the next five years.

Most of the other stocks on the list are too small to write about here -- or they're in the shipping sector, an industry I have definitively proved I should never write about again. However, these two are the start of a pretty good gift list for investors.

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