I have spent the week thinking about big-picture and macro-related issues from the perspective of a value guy, and I want to head into the weekend by getting back to my micro, single-company focus. With that in mind, I sat down this morning and ran my perfect stock screen.
To find a perfect stock, I run a screen based on Walter Schloss's investment criteria and add in a requirement for a dividend. This has been a valuable source of safe and cheap stock ideas over the years, and the portfolio has consistently outperformed the stock market. Using a quick-and-dirty back test, this approach has beaten the market by more than 70% on an average annual basis for more than 20 years. More important, there have been only three down years in the past two decades, and the biggest loss was just 15% during a year when the stock market was down almost 40%.
The most interesting stock on the current list is Leucadia National (LUK). I have written about this name before, as, in addition to being a great company, it is the perfect inflation hedge.
The company owns oil and gas assets as well as timber -- all of which will respond well if all the money printing eventually leads to higher inflation. Leucadia also owns a large stake in Jefferies (JEF) and has a joint venture with Berkshire Hathaway (BRK.A/BRK.B) that originates and services mortgages.
In any economic recovery with a hint of inflation, this stock should move substantially higher. For now, you own assets purchased at distressed prices across a wide range of industries that should hold up as the economy struggles to get back on track. I think this is a stock you can buy here and just keep buying if the price falls further.
Consolidated Water (CWCO) has been in the perfect stock portfolio for well over a year now and hasn't done much trading within a fairly tight range over that period of time.
The company provides water utility services in the Cayman Islands and operates desalinization plants throughout the Caribbean. Results have been basically flat for the past couple of years along with the global economy but should pick up when travel to the region strengthens. Drinking water is scarce in the islands and the company has a fairly wide moat in the desalinization business in the region.
Eventually, this will become a solid growth stock, but for now, you can buy shares at tangible book value and enjoy a solid 3.5% dividend yield.
When I ran this screen last year, there were more than 50 names on the list. Today, there are just 36, and most of them are either community banks or insurance companies. The average price-to-book ratio on this year's list is almost 1 compared to August 2011's 0.80, so even the perfect stocks have gotten pricier.
If you're selective and can make Mr. Market work for you (not against you), scale buying into perfect value stocks should be a winning proposition.