As stocks continue their fall today, I have to confess that I get a huge kick out of all the commentary surrounding the whys and hows of the decline.
China gets most of the blame for the fall. One very learned-looking fellow on TV opined this morning that all we need to do is figure out if the China decline was going to continue and keep the United States from growing and then act accordingly. That's a relief. All I have to do is figure out the economy of a communist nation whose government is probably making their numbers up out of thin air for purposes we cannot determine and investing success is mine!
The most repeated comment I am hearing is that many stocks are already in bear-market territory, having fallen more than 20% this year. In fact, a quick check on the S&P 500 shows that 81 stocks, or about 16% of index components, have hit the magic 20% decline level that the experts tell me is bear-market territory. Sixteen of those are in the energy business, so that leaves us 65 companies or just 13% of stocks in the S&P 500 that are already in bear-market territory. One hundred seventy-eight stocks are down 10% or more, so only 36% of the index stocks are in what is commonly thought to be a correction.
I took the "stocks already in a bear market" idea one step further and ran some basic screens and added a bear-market component status to see what I could find. I ran my basic Walter Schloss screen this morning that looks for safe and cheap stocks with insider ownership levels that indicate management has some skin in the game. I then limited the list to just those that were down 20% in 2015 and could be considered as being in a single-stock bear market. I found just 43 stocks that qualified and only 14 of them were larger than $100 million in market cap. Twenty-three were larger than $25 million, so it is hard to say this market pullback has created a bunch of safe and cheap stocks so far.
Having said that, there are some interesting names on the list. Those of you who are familiar with the concept of cash secured put selling should take note that I would consider these cheap, beaten-up stocks to be great candidates for selling puts on full margin to back into the stock at a lower price. Volatility is back at levels where you can get paid for selling puts, so I would break out that tool in the current environment.
Kelly Services (KELYA) is one of the largest staffing and workplace solutions companies in the world. It employs directly and indirectly through strategic partners more than 1 million around the world. The global economy is struggling, but Kelly has been able to grow earnings at more than 15% a year and I see no reason it can't maintain that level. In addition to an eventual pickup in hiring, Kelly has some new projects in talent supply chain analytics that could be a driver of long-term growth. The stock is trading at just 65% of book value, so it's certainly cheap. Kelly has very little debt on the books and is financially strong enough to survive until it can thrive again.
Northwest Pipe (NWPX) is another stock that has fallen into its own personal bear market and might be worth buying here, if you haven't already. The pipe and tube company recently announced it is selling its energy-related tubular products business to focus on the core water transmission and wastewater infrastructure business. Water-related infrastructure is going to be a huge business in the years ahead as we repair outdated existing plants and take steps to help provide water to drought-stricken parts of the country. Northwest Pipe could well end up being a growth stock and market darling over the next decade, and right now we can buy it very cheaply. At today's price, the stock trades at just 70% of book value. The balance sheet is solid and long-term owners of this company should do very well.
As stock prices are falling again today, we are seeing a few stocks drop into bear-market territory and become candidates for buying, or -- for those experienced in such matters -- cash secured put selling. However, it is not as widespread as the TV taking heads might want us to think. In the immortal words of Hill Street Blues' Sgt. Phil Esterhaus, "Let's be careful out there."
