4 More Helpings of Schloss for Value Investors

 | Nov 25, 2015 | 3:30 PM EST
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As we head into Thanksgiving and what for many will be a four-day weekend, I want to take a final look at the results of my Walter Schloss-based screen.

Famous for his value approach, the late Walter Schloss has probably had the most influence on me of any investor. He bought cheap stocks and held them until they weren't cheap anymore. He eschewed computers and research services, relying primarily on Value Line and the Standard & Poor's Stock Guide. He came to work and 9 a.m. and left at 4:30 p.m.

Schloss made the market work for him by buying on a scale and taking advantage of fluctuations to build a position. And he didn't let news and noise influence him very much, saying once that "I don't like stress and prefer to avoid it. I never focus too much on market news and economic data. They always worry investors."

It is this style that best fits my approach to investing.

Schloss was also aware that depressed stocks almost never turn around as soon as you buy them. In fact, they usually go down and you have to have the "guts" to buy more when that happens.

That's the case with Stage Stores (SSI). The stock is cheap so I bought some of the retailer. After the company had a lousy earnings report and guided down for the year, the market crushed SSI. But I took note that in the same announcement, management said that they were reinstating the buyback program as the stock was too cheap at current levels.

Stage Stores' sales and earnings dropped in large part because of low oil prices in many of the company's markets and a strong dollar in its stores along the border. These are not permanent conditions, however, and the stock is trading at half of book value right now.

The company declared a regular dividend for the quarter and the shares currently yield about 8%. Even if it was cut in half next year, SSI is a high-yielding stock. I haven't added yet but I will be before too long.

It is exactly the same situation at Northwest Pipe (NWPX). Shares of the Vancouver, Wash.-based water infrastructure company were cheap, so I bought some. Then, the company reported earnings and the stock fell some more. I have not bought more yet, but it is a safe bet that I will.

Northwest Pipe is looking for a buyer for its tubular steel division in order to focus on the water transmission business and I think that is a terrific move. The water infrastructure in the U.S. needs repairs and upgrades and Northwest Pipe will be a huge beneficiary when that money finally starts flowing. The stock trades at 50% of book value and the balance sheet is strong enough for the company to survive until it thrives again.

I have not bought back into L.S. Starrett (SCX) yet but it is definitely on my radar screen. I owned the stock a few years ago and did very well with it. I will be happy to buy it again when we get a decent market decline.

Based in Massachusetts, Starrett makes tools such as chalk lines, saw blades and vision measuring equipment. While its business may not be exciting, the stock is getting cheap, trading at just 83% of book value. The balance sheet is strong and as the global economy slowly improves so will sales and earnings.

SCX is currently yielding some 3.6%, so you enjoy a decent yield while you wait for conditions to improve. Insiders own 17.5% of the stock, so they have plenty of incentive to keep things on track until business improves.

CDI Corp. (CDI) has a large presence in staffing for oil and gas companies. As a large part of the company's client base has been laying people off, not searching for new hires, business is not very good right now. However, CDI is taking steps to diversify away from oil and gas and recently bought EdgeRock, a staffing company with more of an IT focus.

In the meantime, CDI stock is very cheap, currently trading at 65% of tangible book value and about 80% of net current assets. The company is financially strong and should be able to withstand the rocky industry conditions until things turn around. Insiders own 10% of the shares so they have skin in the game and plenty of incentive to get the stock price higher over time.

Walter Schloss built an incredible track record buying inexpensive stocks with a high chance of survival and hanging on until they turned around. It is a simple, but difficult approach for many investors to implement as it takes a great deal of patience and discipline. But if you have the tools to invest this way things should turn out very well for you over time.

It is Thanksgiving so I want to take a moment and express my gratitude to the Real Money editorial staff who consistently make me look far smarter and articulate than is actually the case!

Happy Thanksgiving everyone!

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