All eyes will be on the Fed today and everyone will spend the next few days dissecting what Fed Chair Janet Yellen did and did not say at her press conference following the release. I cannot imagine a less productive use of time than Fed watching right now -- unless it is trying to pick which stocks will go higher because of World Cup.
The Fed announcement today is going to look a lot like the one last month, which is going to look a lot like the one next month. My time is better spent looking for cheap stocks instead of joining the great Yellen Watch.
One ongoing debate within the value crowd is which metric works best. Many favor book value and others that prefer Enterprise Value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) as their chief measure. Although my preference for price-to-book value is well known, I am fond of EV/EBITDA as well. It is the measurement used by many of my friends in the private equity world when they search for undervalued companies to buy. I have used this metric to find some outstanding opportunities over the years and it is a valuable tool in my stock-picking kit. Academics and practitioners alike have demonstrated that both measures work very well as part of a long-term value approach to investing.
This morning, I looked for stocks that will make everybody happy. I ran a screen to search for stocks that trade below book value and have an EV/EBITDA ratio of less than 5. A short list of stocks are cheap on both measures, but there are some interesting names on the list.
Tropicana Entertainment (TPCA) has nine casinos that it operates in Indiana, Louisiana, Mississippi, Nevada, New Jersey, Aruba and Missouri. Carl Icahn has control of this company -- he owns about 70% of the shares. The only real question is: What does he intend to eventually do with it? I expect that at some point he will sell it at an attractive price. Those who also own shares at that time will see a decent increase over today's price. The stock currently trades at just 83% of book value and has an EV/EBITDA ratio of just 3.5, so it is a double bargain. This probably won't be a very exciting stock until Icahn decides to take some sort of action, but it should be a rewarding long-term holding.
SkyWest (SKYW) has problems with its United Express business that are going to be a drag on its earnings for some time to come. Getting out of the unprofitable relationship with United Continental is going to take a while, as the contract lasts until 2020. As the company slowly gets out of the smaller 50-seat aircraft and replaces them with the more profitable 76-seat planes, earnings should slowly rebound. In the meantime the stock is very cheap at its current price. The EV/EBITADA ratio is just 4.28, and the price-to-book value ratio is less than .50. As a long-term holding, this stock has the potential to double or more over the next few years.
Renewable Energy Group (REGI) was something of a hot stock in 2013 -- the shares almost tripled in value -- but they have cooled off quite a bit this year. The biofuels company disappointed Wall Street with its lower-than-expected profits and reduced guidance. The stock is down about 15% over the last year and 34% off its 52-week highs. The company is now trading at bargain levels, at just 90% of book value with an EV/EBITADA ratio of less than 3. Renewable Energy just completed a transaction with Tyson Foods (TSN) that will increase its biofuel capacity by about 30%. This could drive sales and profit growth going forward.
I have never found focusing on short-term events such as Fed news conferences or economic releases to be of much value. Looking for cheap stocks that can move higher by several multiples of my purchase price and ignoring the day-to-day stuff has always been a far more profitable use of my time. Combining price-to-book value with the EV/EBITADA ratio produces some stocks that are likely to do just that.
