Now that 13F season has ended, I can get back to kicking over rocks to find safe and cheap stocks. After reading all the institutional filings with the Securities and Exchange Commission over the weekend, I found myself wondering what a current 13F filing from the late Walter Schloss might look like. Schloss has had an enormous influence over my investing career, and one of my favorite screens is based on his criteria for buying safe and cheap stocks. He and his son Edwin used simple rules to rack up a 47-year record of about 20% annual returns, so it makes sense to continue using those rules today.
The rules were simple. Schloss looked for stocks trading below book value that had sound balance sheets and little debt. He liked to buy companies that had insider ownership, so that management and investors were sitting on the same side of the table. Once he found stocks that fit his criteria, he wanted to buy them near three- or four-year lows.
These rules may be simple in theory, but can be difficult to apply in reality since you are buying out of favor, unloved stocks that have been falling in price for a very long time. But once he found a stock he liked, he tended to hold it for much longer than most can stand it in today's short-term, fixated world. His average holding period was about four years.
The Schloss screen produced an interesting list of stocks today. Naturally, there are energy-related names on the list, given the recent market action in these stocks. Gran Tierra Energy (GTE) is a Canadian company that explores for and develops oil and gas properties in Colombia, Peru and Brazil. The company has been growing at a decent clip the past five years, although that is almost certain to slow because of lower oil prices. The stock is certainly cheap enough right now as it trades at 90% of tangible book value and the company has no long-term debt. The current ratio is 2.9, so it looks as if it has enough short-term capital to keep the doors open and the lights on until pricing improves. Insiders own 6% of the $1.2 billion company. Had Walter Schloss been buying the stock recently, he would have had good company, as Wasatch Funds, Franklin Templeton, Renaissance and Dreman Value Management were all buyers of the stock in the third quarter. The stock is just 15% above three-year lows at today's price, around $4.50 per share.
LeapFrog (LF) is one of those frustrating stocks that work their way on and off the deep value lists over the years. My kids are a long way from being young enough for their products, but the company has a fantastic lineup of educational programs, games and toys for younger kids. Three of their products were just named best of the best for 2014 by Dr. Toy, and Wal-Mart (WMT) said that the company's LeapTV is one of the hottest toys this holiday season. In spite of this, the company has seen lagging sales this year as new products were delayed until later in the year and the significant inventory that had built up in 2013. The stock has fallen back onto the cheap list, trading at just 89% of book value. LeapFrog has no long-term debt and the current ratio is a healthy 3.6, so the company is financially sound. The shares are trading at about 15% above the three-year lows heading into the most important selling month of the year. Insiders own 17% of the company, so they have a vested interest in getting the stock price higher going into 2015. Had Schloss been around to buy the stock, he would have joined Franklin, Royce Funds and BlackRock (BLK) as buyers of this potential bargain issue.
Back to energy, two seismic data companies made this list of Shlossian bargains. Mitchum Industries (MIND) and Dawson Geophysical (DWSN) collect, process and sell seismic data to the oil and gas industry. Business has been slow, as companies have delayed capital expenditures amid the weak pricing environment. Dawson trades at 60% of book value, with a current ratio of 4 and minuscule long-term debt. The stock is trading at 60% of book value and insiders own 5%. Mitchum shares fetch just 70% of book value and have a debt-to-equity ratio of just 0.15. The current ratio is 4.76, and insiders own 15% of the company. Both stocks are less than 2% above their three-year lows.
Walter Schloss passed away in 2012, so it's tough to know for sure what he might have been buying today, but based on the philosophy he espoused during his life, I suspect these stocks would been on his list of potential bargains.