I spent a lot of time running screens yesterday, poking around the corners of the market looking for bargains. It is becoming something of a daunting task these days, as stock prices remain elevated. I miss the days when the screens popped out so many names I would be reading 10Qs and Ks well into the seventh or eighth inning of the game each night. I am lucky to find enough research material to get through to starting pitchers warm up tosses these days. This market is more picked over than the local farmers' market after 10 a.m. or so. There is stuff left on the table, but not much of it is very good.
I ran one of my favorite screens this morning and found just a few names. In fact, there were only three names resulting from a screen that usually produces a couple of dozen candidates. The screen is based on Benjamin Graham's enterprising investor criteria, with some modest tweaks of my own. It looks for companies that have decent balance sheets with debt-to-equity ratios below 0.5 and current ratios over 2. To pass, a company has to have paid dividends for the past 10 years without interruption. Of course, they have to be very cheap based on asset values, so the price-to-book-value ratio must be less than 80%. While we only got three names, all three are potential gems that the market has over looked in its shopping spree.
I have owned Hardinge (HDNG) before and am pleased to see it come back to bargain levels. This is not an exciting company with breakthrough technologies or hot consumer products, so it is way off Wall Street's radar screen. They make machine tools like lathes, machining centers and grinders. They sell them to all sorts of industries including aerospace, automotive, computers, defense, energy and medical equipment, so they do have exposure to some of these more exciting industries. The global economy is slow, so business is slow right now. According to the last earnings report, it probably will be better for the second half of the year and 2015 looks pretty good based on the current order prospects. This is a solid company with a strong balance sheet, trading at 80% of its tangible book value.
I could write almost the same paragraph about The L.S. Starrett Company (SCX), except their business may be even more boring and of less interest to the traders that are the bulk of market activity these days. They make saw blades, tape measures, levels, squares and laser measuring systems. There are two share classes and the Starrett family has control of the company, and this has also kept a lid on share prices. I'm not always a fan of the two-class structure. But the company points out on its web site: "almost every person who works in the company is a stockholder, and approximately one-half of the ownership of the company rests in the hands of present and retired employees." The family may have control, but reading the filings I get a sense that their interests are aligned with those of outside shareholders. This is a solid 134 year-old company with a strong balance sheet, trading at 80% of book value. The stock yields 2.6%, so I get paid a little bit while waiting for the price to move higher.
I have owned shares of our third safe and cheap stock for a while now, with very modest results. Richardson Electronics (RELL) makes products that are used to control, switch, or amplify electrical power signals. These products are also used in display devices in various industries like alternative energy, broadcast, communications, medical, and semiconductor markets, so they do have exposure to some of the more exciting market sectors. Business has been flat and so has the stock been for quite a while now. Richardson is cash-rich and management is using the cash to buy back stock and is looking for acquisitions that might help drive future growth. The short term may not be exciting, but I am quite happy to own shares in a solid company with a fortress balance sheet at 80% of book value. The yield gives a 2.4%payout.
Finding super safe, cheap, dividend-paying stock is not easy right now, but there a few companies around that offer just that. These three make sense as long-term holdings regardless of current market conditions.