I am a big fan of stocks trading near their lows. I know all the really exciting stocks like Amazon (AMZN) and Facebook (FB) are up there on the list of stocks making new 52-week highs. But I am not interested in buying excitement in the stock market.
I have found over the years that excitement is expensive. I can watch a baseball game or read a Nelson DeMille novel when I am in search of excitement. When it comes to investing and the stock market, I want to buy stocks on sale and that means the new low list. Some of the best investors of the last century like Robert Rodriguez and Walter Schloss have championed buying stocks off the new list. I loathe to argue with people much smarter than I am.
I sat down this morning and ran a screen for stocks trading near their 52-week lows that also passed a basic Graham screen of less than 15x earnings and 2x book value. You might recall that in one of his discussions on stock selection, Graham had said that the quotient of price-to-earnings ratio multiplied by price-to-book value should be less than 22.5 for a stock to be considered for a long-term investment. It is a great rule of thumb that I have used for sizing up stocks over the years, so I applied it to the new low list.
I was pleased to see that several of stocks are on the list and are still cheap enough to buy in spite of the strength in the market so far this year. I have had at least a small position in Transocean (RIG) for so long that if I ever looked over my sheets and didn't see it I would be concerned. At 10x earnings and 12.2x book value, the offshore driller is still cheap. The shares pay a 5% dividend so you get paid to wait until the drilling activity increases and the still lingering cloud of the Gulf oil spill lift.
Berkshire Bancorp (BERK) has just drifted along in the couple of years that I owned the stock, but it is a high quality bank trading at 90% of tangible book so I am willing to just sit and wait with this stock.
MFC Industrial (MIL) keeps sliding as is currently trading at just 5% of its current low. The commodity supply chain and logistics company is seeing weak business conditions as global commodity demand and usage is down as a result of the stagnant global economy but the stock is very cheap at this level. The shares trade at just 70% of tangible book value. When we get a sustained recovery this stock has the potential for outsized returns form current levels.
Titan International (TWI) is an interesting company that is trading around new lows. This company makes undercarriages, wheels and tires for vehicles used in construction, agriculture, mining and off-road vehicles for consumers. All of these sectors have been pretty weak over the past couple of years and the stock has suffered along with its end users. U.S. markets, particularly agriculture, will probably remain weak for the rest of this year and into 2014. The company is expanding, however, into areas that should grow a little faster, including Eastern Europe and Latin America. At 9x earnings and 1.2x book value, the stock is cheap enough to merit consideration for long-term investors.
I am starting to see some banks on the list as the run in the regional banks is catching its breath and there has been some selling in the sector.
Farmers & Merchants Bancshares (FMBN) is trading a little less than 10% off the 52 weeks lows and right at tangible book value. The bank has 19 branches serving eastern Ohio with about $1.1 billion in total assets. The equity to assets ratio is almost 10 and nonperforming loans are less than 2% of all loans, so the bank is in solid financial shape. If the stock should drift back below the current lows, it would make a fine fit to a Trade of the Decade portfolio of small banks.
Shopping on the new low list makes sense to me. When World Market here in Orlando has a big wine sale, I run up and fill the wine fridge to the maximum. If the grocer puts rib roasts on sale, I am buying a few of them. If I can buy things at the lowest price in the last year I am interested.
I simply apply the same logic to the stock market in search of ideas that can return multiples and not percentages over the next few years.