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  1. Home
  2. / Investing
  3. / Consumer Discretionary

Sears Hometown Has Some Strong Points

Local franchise owners are more customer responsive.
By TIM MELVIN Feb 12, 2015 | 01:30 PM EST
Stocks quotes in this article: WMAR, HDNG, RELL, AOSL, CDE, LF, SHOS, SHLD

I want to review today some of the other stocks we found using a two-factor search model based on an interview Ben Graham gave back in 1976, shortly before he passed away.

Graham used earnings and equity-to-asset in one version of the model, but also remarked that you could substitute asset value and produce acceptable results as well. I ran the screen Wednesday and discovered some ideas worth consideration for long-term investors.

There are some old favorites on the list. West Marine (WMAR) still qualifies and I think that as a long-term holding the boating retailer should deliver outstanding long term returns. Machine Tools Company Hardinge (HDNG) makes the grade as does long-term holdings Richardson Electronics (RELL) and Alpha Omega Semiconductor (AOSL). Silver miners Couer Mines (CDE) and Hecla (HL) are also still bargain issues at current levels using this model.

Leapfrog (LF) is on the list and is cheaper than ever after another disastrous holiday season. While this company makes fantastic games and other educational toy for kids, they remind me a bit of Worlds of Wonder. WOW came up with the Teddy Ruxpin talking teddy bear doll back in the 1980s as well as some other pretty exciting toys.

They knew everything about making toys and next to nothing about running a business. They eventually put themselves out of business by taking on too much debt. Leapfrog management has been a lot more conservative with the finances, so bankruptcy is not a risk while they make outstanding products that get great reviews from both the toy industry and educators. Based on results, however, they just are not very good at running the business. They need to sell to a larger toy concern, or even a private equity firm with more of an eye on bottom line results.

Sears Hometown and Outlet Stores (SHOS) has shown up on several screens I have run in the past month. I have not bought it yet, but I am probably going to own it before too long. The subject of Sears (SHLD) came up in a discussion last week and I remarked that I had not been in one of their stores in forever. I am not a fan of that stock and think they missed the opportunity to spin the real estate into REIT. It would have been a big hit before the credit and real estate crisis. Today, with malls and shopping centers in something of a decline I do not think it would as well.

My wife gently reminded me that when we lived on Kent Island we actually bought a bunch of appliances and a gas grill from the Sears Hometown outlet. She said we had been very happy with them and the local franchisee. The big stores may not deliver anymore, but the locally-owned Hometown outlets seem to be doing pretty good

Using the franchise model and focusing on smaller cities and towns around the country, Sears Hometown is expanding fairly rapidly. Pull up the headlines in one of the stock sites and look; it is full of new store opening announcements. New stores have opened in Covington, LA, Charleston, SC, Dothan, AL, Manhattan, KS and Waveland, MS.

They are making the lists of best franchises from publications like Franchise Gator and Entrepreneur. I like the franchise model for this company as local owner operators tend to be much more focused on customer service than the large department stores. They will earn repeat business from their community. I think the stock has enormous long-term potential from current prices.

The company has very little debt and the equity-to-assets ratio is .60, so it passes Ben Grahams test for a conservatively-financed company. The stock is certainly cheap as the stock trades at 60% of book value and right around the value of my estimate if its liquidation value. Sears Hometown has shown up on several screens of late, including my Walter Schloss-based screen and will probably appear in the portfolio on the next healthy down day.

Using this simple two-factor approach to picking stocks seems to have a great deal of validity. Graham laid out the selling criteria as well telling investors that once they had assembled a portfolio of safe and cheap stocks, they should hold those stocks until they had returned 50 percent.

 Or, if a stock hadn't met that return objective by the "end of the second calendar year from the time of purchase, sell it regardless of price." This strikes me a sound way to manage a portfolio of safe and cheap stocks.

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At the time of publication Melvin was long CDE, LF, HL, HDNG, RELL and AOSL.

TAGS: Investing | U.S. Equity | Consumer Discretionary

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