Before we move into the weekend, I want to take one last look for reasonably financed quality companies trading at bargain prices -- using my favorite measure of value. While Wesley Gray and Tobias Carlisle have convinced me that using the enterprise value to Ebit ratio makes sense, I use it in addition to price to book value. Buying assets for less than they are worth has worked very well for me over the past three decades, and I see no reason to abandon the approach at this point of my life. I have also found that using F-scores, along with price to book, improves performance drastically by eliminating most of the potential blowup stocks from the mix.
I sat down and ran my low price to book value with high F-score screen yesterday afternoon. Once again, the list of companies is very small -- just a handful passed through the filters. It is not a cheap market and there are not a lot of great ideas, but we can still pick though the handful we do find.
At the top of the list is Ares Commercial Real Estate (ACRE) . While they have more debt than I might normally accept, it has a leveraged business model -- and the firm uses a lot less leverage than many banks and other lenders in the commercial real estate space. I think this a fantastic time to own or finance commercial real estate projects. I might not be a buyer of CRE at the current pricing, but I do not see any developing credit issues in the space, either.
Rates of return will be lower for buyers at current prices than buyers over the past few years have seen, but there is no bubble or developing risks in CRE right now. Lenders are more concerned with the stability of collateral and the ability of the property to generate sufficient cash flow to pay the mortgage -- and on that basis, commercial real estate is in great shape.
Ares Commercial Real Estate benefits from its relationship with Ares Management (ARES) , a large private equity and alternative investment company with a focus on credit investing. It sees deals and has access to underwriting knowledge not available to most of its competitors, and I think it gives them a significant advantage in a crowded, competitive market. The stock is trading at just 90% of book value and has an F-score of 8 out of a possible 9, so the stock is cheap and the fundamentals are solid. The shares are yielding 8.21% at the current price, so it is a solid choice for income as well as investors looking for long-term total return.
One of my favorite community banks makes the list of safe and cheap stocks. First Northwest Bancorp (FNWB) is based in Port Angeles, Washington, and has nine branches with about $1 billion in assets. The bank completed its mutual conversion offering back in January of 2015 and still has plenty of capital on hand to grow the bank and reward shareholders. Unlike many community banks, First Northwest is still very much in the single-family mortgage business, with about half of the loan portfolio in family homes. Nonperforming assets are just 0.32% of total assets, so the loan portfolio is in great shape right now. The stock is trading at 87% of book value, with an F-score of 7, so it is definitely a high quality, cheap stock at the current price.
BRT Realty (BRT) is an old favorite that makes the list. The real estate investment trust has undergone a significant change -- transforming from a finance REIT to one that owns 8,973 units at 31 multi-family properties, most of which are located in growth markets in the Sunbelt region of the country. The company thinks its shares are undervalued, and in the second quarter bought back 66,554 shares in the open market. Legendary value investor Michael Price thinks so as well, as he is one the largest shareholders of the REIT. BRT shares trade at 71% of book value and have an F-score of 7, right now.
Most of the world has focused on the Fed this week, but I have found that watching the Fed minute by minute is a waste of my time. They will do what they do when they do it, and I will be a position to react to whatever the markets do in response. Rather than join the ranks of those battered and bruised by Fed guesses gone awry, I think I am better off digging through the markets for stocks that pass filters of safe and cheap. Low price to book value combined with high F-scores is a proven way to accomplish that task.