Before we move into the weekend, I want to review one of my favorite ways to use F-scores. It is a useful tool in all steps and stages of stock selection process but it really shines in finding investments with a little more of a long-shot flavor to them. These are companies that carry more debt than I would usually consider acceptable and that trade at steep discounts to their asset value. A high F-score indicates to me that a company's fundamentals are improving and that it is generating sufficient cash to carry the debt load. In addition, there is a high probability that the two-edged sword of leverage will cut in our favor.
In running the screen for leveraged companies trading below tangible book with high scores, I noted an unusually short list of candidates. Just 24 U.S.-listed names make the final cut. Only eight of these have a market cap in excess of $100 million. There is only one stock with a market cap above the billion dollar mark. As the market has worked higher this year, the list of opportunities for cheap stocks has gotten shorter and smaller.
It is still a pretty interesting list of long-shot cheap stocks. One my favorite real estate investment trust (REIT) names made the list. Arbor Realty (ABR) is trading higher (by a comfortable margin) than it was when I originally purchased it but fundamentals keep improving and the stock is still a solid buy. The shares trade at 80% of the $7.58 tangible book value and management estimates that total asset value after adjusting for swaps is above $11 a share. Arbor has been making loans and originated more than $80 million of new loans during the quarter. The company also purchased $30 million of residential mortgage securities in the quarter. After a solid quarter, Arbor management raised the quarterly payout by 10%. The company has an F-score of 7, indicating a substantial chance of strong appreciation in addition to the dividend payout.
The aircraft leasing business is well represented on the list as well. I recently highlighted AerCap Holdings (AER) as a cheap stock with a high ranking from Standard & Poor's. The stock still trades at less than 70% of tangible book value and has an F-score of 6. Aircastle (AYR) also has an F-score of 6 and trades at less than 60% of tangible book value. Aircastle's portfolio includes 155 jet aircraft that are leased to 64 different airlines around the world. The fleet is 98% leased with more than four years of average lease life, so cash flows should be relatively stable for the company. The shares currently yield 5.4% at the current price.
Another one of those pesky shipping companies makes the list as well. I am gun shy due to past poor results from shipping stocks, but they are constantly showing up on my lists of cheap stocks with high long-term appreciation potential. Global Ship Leasing (GSL) is a container leasing company with 17 ships on long-term leases to CMA CGM S.A, the world's third largest ocean liner company in the world, with an average lease life of more than seven years. Unlike many shipping companies, Global has been generating operating profits throughout the global recession with operating profits every quarter since the start of 2008. They have been using their cash flows to deleverage the balance sheet and have paid off almost $140 million of debt in the past three years. The shares trade at around 50% of tangible book value and the improving fundamentals are reflected in its F-score of 7.
Using asset value and F-scores has helped me uncover some great opportunities over my career. Right now, the list is small and most of the candidates are in industries such as aircraft leasing, shipping and commercial real estate (as reflected by the three companies mentioned above) that have been hit hard by the economic weakness. As long as the world does not really end, I believe these names will return to prosperity over the next decade and that shareholders in these stocks will do very well.
On a final note, I want to wish a safe weekend and a speedy recovery to all my friends who were impacted by Hurricane Sandy.