Today I want to keep looking at those industries that are cheapest, based on the Shiller PE in today's market. The market long-term mean Shiller PE is 16.6, so I want to focus on industries that trade below that level and find the safe stocks in the cheap sectors to see if we can find some with strong rebound potential and gain a little edge over the market. The problem we have been running into is that while there are lots of cheap stocks in the least expensive sectors, there are not so many safe stocks from which to choose.
Credit services makes the list of cheapest sectors, but I really struggled to find any that have much of a margin of safety. Medallion Financial (TAXI) is trading at 72% of book value, but the company finances taxi medallions and faces a big challenge from Uber. The F-score of 6 indicates that the balance sheet is in OK shape and financial conditions and prospects are improving and the stock should go higher. That's all out the window if Uber continues to prosper at the regulated taxi industry's expense.
I own a bit of this one as I am pretty sure Uber loses here. I think Uber is a great idea, but I do not see the municipal governments that earn badly needed cash from regulating the taxi industry going quietly into the good night. There is also a basic fairness issue here. Either Uber has to play by the same rules as the taxicabs or taxicabs have to be able to operate on the same unlicensed, under-regulated basis as Uber.
There will be lots of noise and shouting, but the municipal governments need the money and want the control of the industry. At the end of the day, I think Uber finds out that you really cannot fight city hall and medallion financing remains a decent business. Medallion shares will be volatile, but the double-digit dividend should ease the pain until the picture improves. It could be quite volatile over the next several years, so I would stay small and move slow.
We do a little better with the next group, real estate and real estate services. One of my favorite stocks is on the list. Although I ranked them based on EV/EBIT, Brookfield Property Partners (BPY) also trades well below management's $28.79 estimate of net asset value per unit. You basically own some of the best commercial property in the world with this partnership. It has office, retail, industrial and hotel properties as well as a triple net lease business that owns a 15.6-million-square-foot portfolio of real estate that has been triple net leased with approximately 300 automotive dealerships across North America. Most of the properties are located in the U.S., Canada, U.K., Australia and Brazil. The stock trades with an EV/EBIT of 4.23 and yields 5.01% at the current price.
I wrote not long ago about Re/Max (RMAX), the real estate brokerage firm. It has over 100,000 agents and is perfectly positioned for what I think will be a long, slow housing recovery. Business should get just a little bit better each year and the stock price should continue to move higher. The stock trades with an EV/EBIT ratio of just 4, but I am reluctant to chase a stock that is up a little over 40% in the past year. This is a high-quality company that is near the top of my buy-in-a-pullback list.
The cheapest real estate stock out there right now is Forestar Group (FOR). It has a fantastic real estate development business that has 11 projects representing approximately 24,400 acres currently in the entitlement process, and 74 entitled, developed and under development projects in 10 states and 13 markets encompassing over 11,200 acres, comprised of over 18,500 planned residential lots and approximately 2,000 commercial acres. Unfortunately, it also spent a lot of money to get into the oil and gas business and that has hurt badly and the stock price has suffered as a result. After falling 33% over the past year, the stock is trading at just 63% of book value.
This underperformance attracted activist investors and SpringOwl Associates LLC and Cove Street Capital LLC ended up with seats on the board. The company has since announced a change in direction and will cut cap-ex in the oil and gas business and just harvest whatever cash flows they can while focusing on the real estate business. Forestar owns 70,000 acres of well-managed timberland that it plans to transition, over time, into real estate properties as tax-efficiently as possible, according a recent press release. It is also going to focus more on multifamily housing. The turnaround is not without some risks, but it looks to me like the real estate business is worth at least twice the current price if Forestar can minimize further damage from the oil and gas properties.
Looking for cheap stocks in cheap sectors turns up a few interesting ideas, but it is still a pretty sparse inventory right now.