While I was feverishly flipping channels between all the playoff possibility baseball games last night, I had some time to ponder the concept of buying stock in companies that are currently losing money but expected to turn a profit within a year. Specifically, I began to wonder what would happen if we combined this idea with my core tangible book value metric. Could the strong possibility of a profit in the next year help lift the shares of companies that were undervalued on an asset basis? Judging by the results of the screen I ran this morning, I have been practicing this variation of this all along.
The screen turned up many companies that I already one. Near the top of the list is my favorite natural gas holding EXCO Resources (XCO). The company has struggled the past few years as natural gas prices have plummeted. Still, analysts expect the company to deliver a profitable bottom line next year. This company turned down a management buyout offer in 2011 for almost 3x the current price; the stock will likely trade back near those levels when gas pricing and drilling activity pick up. Some of the smartest investors on the planet own this stock -- Howards Marks, Boone Pickens and Wilbur Ross all own a large stake in company. I have owned it for some time and have no intention of selling it anytime soon.
Calloway Golf (ELY) has been a thorn in my side stock for more than three years now. I love this company as an addictive lifestyle stock, but, so far, spending in the golf marketplace has not bounced back. I have a small position in the stock and I am right around break-even on the shares. Calloway is expected to return a small profit next year and that may finally lift the shares. I would not be surprised to see a private equity firm snap up the company in the next year either. Private equity coffers hold a lot of money and Calloway is a solid brand at a bargain price. The stock was upgraded by one brokerage firm last month, and that could help lift the shares in the near term. We do know that at least one insider is positive on the future of the company as an officer recently purchased more than 17,000 shares of the stock.
I have a solid profit in my Kite Realty Group (KRG) holding, but the stock is still cheap enough to buy. The company has more than 8 million square feet of neighborhood and community shopping centers and the shares are trading at 70% of tangible book value. A sharp decline of new construction of community shopping centers should help occupancy and lease rates for the company over the next few years. The portfolio is concentrated in its home state of Indiana, and there is substantial room for pricing improvement of the underlying properties over the next several years. If you do not already own this stock, you should. It is a solid way to benefit from improving real estate markets and the eventual return of the consumer.
SWS Group (SWS) is another stock I own that has pretty much tracked sideways for some time. The firm has propped up the banking part of its business with capital infusions of $100 million from Hilltop Holdings and Oak Hill capital back in 2011. The stock is trading at just 60% of tangible book value and is expected to turn a solid profit next year. When the bottom line begins to blacken, these shares could easily trade back about their asset value.
Buying stocks below their asset values that are expected to turn the bottom line from red to black in the next year appears to be a solid approach to stock picking. In fact, it is so good that I appear to have been doing it all along. I will be adding this screen to my regular search process.