After today, we have just seven trading days left before we change out the calendar. The pundits and prognosticators are getting into high gear, informing us what will happen next year.
So far, I have seen everything form the sublime to the ridiculous in the early stages of the prediction season. Now that we are going into high gear, it should get even more ridiculous. We will hear about doom, gloom, the end of the world, the collapse of oil, rise of gold and total and complete collapse of the equity markets in the year ahead. We will also hear about lower interest rates, the enormous benefits of cheap energy, low interest rates and rapidly rising stock prices. Virtually every possible path and conclusion for the stock market in 2015 will be predicted over the next week or so.
I guess I should throw my hat in the ring.
In 2015, on most weekdays, the stock market will open at 9:30 and close promptly at 4 each day. In between those times stock prices will fluctuate, sometimes wildly. Lots of stuff will happen this year that is totally unexpected by the markets causing violent reaction in one direction or another. Beyond that I have no clue what the markets will do in 2015. I have some things I think should happen and some I would like to see happen, but as Margaret Mitchell reminds us, "Life's under no obligation to give us what we expect."
A better use of my, and hopefully your, time the next seven days would be looking for stocks that are safe and cheap enough to offer a potential profits without overly exposing us to the risk of ruin. It is more productive to talk about the strategies screens and other tools to dig up cheap stocks than to try to create prediction algorithms or building 37 factor models to make a guess about the knowable economic, political and corporate events that will drive market direction in 2015.
On Friday, I talked about my perfect stock screen and mentioned the small handful of stocks that pass the test. That's a good starting place for building a portfolio going into the New Year. Today want to add to that today by discussing my other favorite stock screen,
The Walter Schloss screen is based on comments and advice the legendary investor gave us over his long career. We are looking safe stocks trading below book value with strong balance sheets trading near three-year or longer lows. We also want management to have skin in the game, so we add a screening criterion for insider ownership.
This screen gives a few more names than the perfect stock screen, as 30 companies pass the tests. But these are, for the most part, some teeny-tiny companies. Just two of them trade for more than $100 million in market cap. Fifteen of them have a total market capitalization of less than $25 million. Eleven trade for less than $10 million in market cap. I can tell at first glance that a lot of them are never going to pass the final review, but a couple of them should probably be in your portfolio.
I know we are not supposed to have favorites, but a stock picked up this screen last month remains at the top of the list. I am a huge fan of the electronic and educational toys made by LeapFrog (LF) and so are the critics and reviewers of the toy industry. The company has struggled greatly with an inventory hangover from the 2013 holiday season, but a strong season in 2014 could get the stock moving again. The company has no long-term debt, plenty of cash and the stock is trading at just 80% of book value. Insiders won 17% of the company, so their interests are closely aligned with ours. When I pulled the buy trigger for my LeapFrog, I did so with the full knowledge that a bad holiday season will send the stock lower and I will have to add at lower prices.
The case for Mitcham Industries (MIND) is pretty simple. If oil prices go back up the company will recover very nicely. If oil stays lower for a long time this company is going to struggle. Mitcham leases and sell leases to geophysical and other equipment used primarily for seismic data acquisition. With oil at $50 and pumps running full blast around the world, no one is going to be spending money for seismic data or equipment to search for oil. The stock is cheap at 53% of book value and insiders have a stake in managing the business to survive until they can thrive as they own 15% of the company. Debt is manageable for now, with a debt-to-equity ratio of just 0.27. This stock is cheap, but I suspect it will test even my patience before we see a significant turnaround in the business.
Rather than try to guess the market direction, I am going to spend the next several days looking for pockets of value and find stocks that fit the strategies, screens and methodologies that have worked well in the past and that I expect to continue to work well in the future.