Today I want to look at some super-cheap stocks using some more updated quantitative methods. Ben Graham's suggestions, as passed along in his 10 investment criteria, have stood the test of time. They still work very well, but others have added to the information pool over the last 80 years, and we can use the tools they have developed to help us find potential winning stocks.
I want to start with the F-school, a financial grading system developed by Professor Joseph Piotroksi. Stocks that have higher scores on the nine-point scale tend to outperform the market over the next several years, according to his studies, and I have found this method to be incredibly valuable in practice as well as theory.
I started my search by looking for the very cheapest stocks in the world. I first screened for stocks that trade at 60% or less of tangible book value. I then threw out all the Russian and Chinese stocks that cluttered up the list, as I have exactly zero interest in investing in either of those two mostly hostile nations. I also added a liquidity measure so we can actually buy shares in the companies and limited my candidate pool to those that trade 10,000 shares or more a day in the U.S.
That gave me a list of 55 super-cheap stocks, out of a database of roughly 10,000 stocks. When I added the F-score criteria to 5 or higher, the list dropped very quickly, and I wound up with just 10 stocks that are super-cheap and have the type of financial and fundamental strength to earn a high F-score.
The super-cheap stock with the highest F-score was something of a surprise. Cliffs Natural Resources (CLF) has seen improvements in its financial statements and currently earns an F-score of 8. The stock is certainly cheap enough, trading at just 56% of tangible book value. The company is pretty much despised by the analyst community, and nobody believes that its earnings will improve for a few years at best. There is an activist investor involved. Casablanca Capital owns 5.2% of the company and wants the company to spin off its non-U.S. assets, cut costs and double the dividend payout. Cliffs' management has tried to come to some sort of settlement, but Casablanca has rebuffed these efforts and said it seeks full control of the company. Casablanca says the company would be worth more than twice the current price if these measures are implemented.
Dry Ships (DRYS) has a fleet of dry bulk vessels as well as oil tankers and offshore drilling platforms. The stock has been weak as shipping rates have slipped somewhat in recent weeks, but the shipping industry appears to be putting in a multi-year bottom. As the world's economy slowly improves and older ships continue to be scrapped, rates should eventually firm for both dry cargo and petroleum products. The stock trades at 46% of book value and has an F-score of 5 right now.
Paragon Shipping (PRGN) also makes the grade with an F-score of 6 and a price-to-book value ratio of just 44%. It is exclusively in the dry bulk markets with 14 vessels hauling iron ore, coal and grain around the world. Shipping will be a very volatile sector, but over the next decade we should see sharply improved industry conditions and much higher stock prices.
SkyWest (SKYW), after rising sharply off it slows back in 2012, gaining more than 200%, has cooled off somewhat in the past year. The stock has pulled back a bit and is now trading at just 46% of book value. The regional airline has 757 aircraft that operate as United Express, Delta Connection, US Airways Express, American Eagle and Alaska under code-share arrangements. The company earns an F-score of 7, so the financial and fundamentals appear to be pointing toward some of the value of this stock being unlocked before very much longer.
Our final company that is large enough to mention here is the Brazilian steel company. Usinas Siderúrgicas de Minas Gerais (URNZY), which is engaged in the production and sale of steel in Latin America. The company is involved in all aspects, so the business includes mining the ore, processing it along customer specifications, providing logistics and delivering finished goods. The stock is trading at just 60% of book value and has an F-score of 6. Brazil has been one of the worst-performing markets in the world and may have sunk to the level of maximum pessimism that presents an exceptional buying opportunity.
Super-cheap stocks that recover can provide spectacular returns that are measured in multiples rather than percentages over time. Using the F-score and price-to-book-value ratio can help investors find these potential bargain issues.
