Mixing and matching Ben Graham's 10 investment criteria has been pretty successful for me over the years. While I do not think it's possible to find a stock that meets all 10 criteria, you can tweak combinations of rules to develop a portfolio that meets your needs and your risk profile. For instance, you can combine these rules to provide a very defensive growth and income portfolio -- as I did yesterday -- or you use them to take a more aggressive approach.
Today I want to delve into the latter tactic, taking a look at using a more aggressive combination of the rules. This strategy might help you find some potential home run stocks -- without you needing to entirely abandon the concept of maintaining a margin of safety.
This time we will set our criteria for stocks that trade at book value of two-thirds or less. These will be among the very cheapest stocks on the plain -- and the ones that ultimately recover will provide enormous long-term returns. The trick, then, is to avoid those that are destined for the trash heap. To help us achieve that noble goal, we will limit our universe to those companies that own as much as or more than they owe, and which have a current ratio of at least 2.
This search provides us an interesting collection of 60 stocks. As with every other screen I have run in the past year or so, the results are heavily skewed towards the smallest of companies. Only eight of the stocks have more than $100 million in market capitalization. One of those is a Chinese company, and I won't touch those with a 10-foot pole. Two others are investment funds, which are an altogether different sort of duck, so I will set those aside as well.
That leaves us five companies that have the potential for huge returns and also have strong enough balance sheets to survive until they thrive. It should come as no surprise that the two cheapest ones are mining companies.
Couer Mines (CDE), a silver and gold miner, has been a favorite holding of mine for some time now. The stock is trading at just 51% of tangible book value and has a debt-to-equity ratio of just 0.24. The current ratio is 3, and the quick ratio is a very healthy 2, so the company should be able to pay the bills for the foreseeable future. At some point in the next several years, silver and the related mining stocks will rally, and I'll then expect to make a tidy sum off this stock.
Thompson Creek Metals (TC) is the cheapest stock on the list. The company trades at 44% of book value and has a debt-to-equity ratio that just makes the cut at 92%. The current ratio is 2.7, and the quick ratio it 1.7, so Thompson should be able to keep the lights on. This stock has been on my radar screen for some time, but I have a huge preference for the silver miners, and his company mainly focuses on other metals. Also, although the company passes our screen, I prefer a little less long-term debt.
Asta Funding (ASFI) is one of the more intriguing companies on the list. This firm is in the business of purchase, management and liquidation of performing and nonperforming consumer receivables, including charged-off receivables. It has also added a business that deals in structured settlements and disability claims. Asta acquired a portfolio of debts a few years ago, and the results have been just south of horrible.
In any case, the company's debt-to-equity ratio is just 33% and, as of the end of the first quarter, most of the market cap was in cash and securities. There are some signs of improvement in Asta's collection business, and management intends to continue to diversify its business mix. Meanwhile, the stock is trading at just 63% of book value -- so, if management can get its act together, the upside potential is enormous.
As with the more conservative screen we ran yesterday, we can use the Graham approach to find a few stocks, but there really are not a lot of bargain issues right now. At the same time, these five would seem to possess an adequate margin of safety, and they are all very cheap based on asset values. Again, they all carry the potential for huge long-term returns for more aggressive value investors.