After reviewing my Wednesday column, which covered the recent memorandum from Howard Marks of OakTree Capital, I thought about how to find securities that would put us in the best position, regardless of near-term broad-market action. Macroeconomic concerns are high -- and, given a general lack of confidence among investors concerning stock and bond markets, it is likely that all our worries are misplaced and that the market will continue climbing a wall of worry. Yet, it's equally likely that some concerns will blossom into an event that will spook the market lower.
It is impossible to predict the path of the market with any degree of certainty, in my opinion. The way to play right now is to buy very cheap stocks that have a good chance of surviving, and eventually of thriving -- and to avoid those that look to be dangerously overpriced. So I ran some screens looking for the type of stocks worth owning in the current environment in order to see if I had overlooked any that we should consider buying. When I look for semi-bulletproof stocks, one of my favorite screens to use is one I call the "perfect stock screen." I look for companies trading below book value, who own more than they owe, are profitable and pay a dividend.
While nothing can ever protect stock prices from short-term market influences, companies that pass this screen are likely to be around when the dust settles, and they should be able to survive long enough to thrive again in the future. In a steep market decline, I'd have enough confidence in stocks that pass this screen that I'd be far more likely to be a clam buyer of them than a scared seller.
One stock that makes the grade is one I have mentioned before, though I'd never pulled the trigger on it. That is going to change after the publication of this article, as I do plan to start buying shares of MFC Industrial (MIL). The company is in the commodity-supply-chain and merchant-banking business.
The basic supply chain finds and delivers commodity products to customers around the world. MFC deals in metals, plastics, animal feeds, ore, chemicals, energy, wood products and other basic commodities. If you need it, MFC will either find or produce and deliver it you around the world. The company can also help with the financing, transportation and storage of commodities for its customers.
The merchant-banking business looks to buy resource-oriented business for less than their determination of intrinsic value. They are not passive investors, but they prefer to control or influence the companies in which they invest. Last year the company purchased Compton Oil and Gas in order to extend its presence in the energy markets, and it also bought an interest in Pea Ridge Iron Ore mine in Missouri, a mineral refinery plant and a power plant. MFC also added two commodity-supply-chain companies, one in the U.S. and one in Mexico, in order to further expand that business.
In the first quarter of the year, the company saw strong revenue growth, but it took a hit to the bottom line as integration costs and one-time expenses hurt margins. Net profit fell by more than 70%, but the company remained profitable and paid the regular dividend. The balance sheet is solid, with more cash than debt, and the stock is cheap at 70% of tangible book value right now. At today's price, the shares are yielding at 2.8%.
The company is due to report second-quarter earnings Aug. 14, and I am not looking for big number this time, either. In fact, I am hoping for a weak one so I can add to the small stake that I plan to take this week. A weak economy could keep MFC from showing the type of earnings-per-share growth Wall Street loves in the short run, but the long-term potential of the business and the stock price are enormous. Well-known investor Peter Kellogg seems to share my enthusiasm, as he now owns more than 30% of the shares.
I have no idea what the stock market will do on a day-to-day or even month-to-month basis. I do see a lot of things that concern me about the market's current condition and structure, but I am also aware that stock prices respond to economic events on their own time frame -- not mine. The best defense is to own stocks that are safe and cheap while holding cash in reserve. To me, MFC Industrial looks to fit the bill and should be in my portfolio. I am a buyer.