As we come to the close of the year it seems like a good time to revisit the Templeton Trade and see if we can uncover any solid longshot candidates for 2014.
One recalls that in 1939, with the specter of war hanging over the world, Sir John Templeton borrowed $10,000 and bought a package of stocks on the NYSE that traded for less than $1. Four years later he cashed them out for a 400% return and a legendary investing career was launched. This will not be a true Templeton Trade since the market is dancing around new highs and not exactly trading under depressed conditions. But it is a worthwhile exercise none the less. I adjust the $1 price a little higher and search for all stocks trading on the NYSE that trade for less than $3.
There are some interesting names on the list, although it is shorter than I have ever seen when running this screen. Only 28 U.S. based companies make the grade as cheap stocks worth investigating as a long-term turnaround investment. When I ran this screen in May 2012 and wrote about it, there were more than 70 companies that were cheap enough to consider. There are an additional 36 companies outside the U.S. but I think that's a whole separate topic worthy of its own future column. It is worth noting that 17 of those are Chinese, and I have a deep aversion to all Chinese stocks.
The largest super-cheap turnaround candidate is a stock I have discussed on several occasion. Weak precious metals prices have pushed the shares of Hecla Mining (HL) down below the $3 mark for the first time since 2009. The stock is trading at just 70% of book value and over the very long term this stock could be a huge winner. The company will need to see gold and silver prices rebound, however, for the stock price to start moving higher. It will take a great deal of patience and fortitude to realize the profits I foresee in Hecla. I like the silver miners and think this is a great longshot stock.
Alliance One (AOI) is pretty much a stub stock at this point with $1.8 billion of debt and just $260 million of shareholders equity. The company purchases, processes, packs, stores and ships tobacco to manufacturers of cigarettes and other consumer tobacco products. They have been refinancing and buying back their debt in an attempt to strengthen the balance sheet and business has picked up so far this year. Analysts are forecasting a strong earnings recovery next year but we all know how accurate these forecasts have been proven to be. It is a high-risk long/ short sort of stock. I note, however, that some smart value types like Donald Smith and Seth Klarman own shares of the company. If you are a super aggressive investor you can buy a little of this and just forget about for a few years in anticipation of a hero or zero result.
Dover Motorsports (DVD) is still in the sub $3 class but the stock price has been improving of late. Dover owns the Dover Motor Speedway and the Nashville Speedway, which feature NASCAR races each year. NASCAR's popularity has declined somewhat but the tracks still attract enormous crowds and earnings are up this year for Dover.
There are a lot of positive things going on with this company and management just raised the annual dividend by 25% and repurchased 315,000 shares of stock in the first nine months of 2013. NASCAR may not be as hot as it was a decade ago but it still attracts huge crowds. Dover will see its share of that cash every year. It is a decent bet on the continued popularity of the sport.
Longshot strategies like buying NYSE-listed stocks trading for less than $3 is not for everyone. You have to have a strong stomach as these things will trade all over the board in the short-to-intermediate term. You have to be extremely patient as well.
Sir John held his basket of stock for four years and I would suggest that's about the right time frame for these situations to work out. If you have the fortitude and patience, however, there is a lot of money to be made in these types of longshots and turnarounds.