If you have followed my search for cheap stocks over the years, you have probably noticed that my two favorite screens, the perfect stock and the Walter Schloss screen never include financial stocks. Finance is a more leveraged business than other industries, so to look for safe and cheap financial stocks we have to tweak the recipe a little bit. Mr. Shcloss didn't really like financial stocks, but I am a huge fan. Some of the best stocks I have ever owned have been financials, like insurance, leasing, and bank stocks. I have had a great deal of success tweaking the Schloss screen to seek out financial stocks that are safe and cheap.
I ran a screen this morning to look for financial stocks that had higher equity-to-asset ratios than their peers, had significant insider ownership, traded near three-year lows, and trading a t a significant discount to book value. This list specifically excluded banks. There is a different set of numbers I use to find safe and cheap banks. While I didn't expect a long list of stocks from this screen, I was surprised to find that only three companies passed. The pool of safe and cheap stocks continues to shrink.
Based on its 87% ownership of CNA Financial (CNA), Lowe's (LOW) certainly qualifies as a financial company. You get some bonus businesses with this stock. CNA is still struggling a bit with low investments returns in a yield-starved world, but underwriting results have continued to improve for the property and casualty insurer. CNA continues to feel pressure from weak property and casualty rates, but the company is profitable, and it should do well as the economy improves. The bonus with Loew's is that in addition to the insurance company, you get to participate in several other sectors. Loew's owns 70% of Boardwalk Pipeline Partners (BWP) and 51% of Diamond Offshore Drilling (DO) giving you substantial exposure to a recovery in oil and gas in the years ahead. They also own Loew's Hotels and Resorts, which owns 18 luxury properties in the U.S. and Canada.
The stock is cheap right now, with the shares trading at 80% of book value. The equity-to-assets ratio is 25, so there is more than enough capital. The final bonus from owning Loew's is that the company is controlled by the Tisch Brothers, who manage the business using what they call "the timeless principles of value investing." The approach has worked as over the last 50 years, the stock has averaged about 16%. Insiders still own about 17% of the shares, so they have plenty of skin in the game.
Baldwin and Lyons (BWINB) is also in the property and casualty insurance business. The company specializes in marketing and underwriting insurance for the transportation industry. Covering things like truck fleets, public transportation fleets and independent truckers. They also offer other forms of business insurance and have a reinsurance subsidiary. Business is pretty good, as the company has reported record premiums so far in 2014. The gains have come from the transportation insurance business, as management is reducing its exposure to professional liability and reinsurance business.
The stock is trading at 90% of book value, and the company has an equity-to-asset ratio of 35, so the shares are cheap and they have adequate capital. Insiders own 9% of the company, so they have some skin in the game.
The poorly named California First National Bancorp (CFNB) also makes the list of safe and cheap financial stocks. The company has an FDIC-insured bank that takes deposits over the phone and internet, but its real business is equipment leasing. It leases things like computer systems, manufacturing and distribution management systems, wireless networks, satellite tracking systems, mining equipment, machine tools, school buses, trucks, exercise equipment, and office furniture. Its customer base includes a wide range of companies, educational institutions, and government agencies. In addition to the leasing business, CFNB also makes commercial loans to select businesses and institutions. The stock is cheap, with the shares trading at just 81% of book value, and it appears to have plenty of capital with equity-to-asset ratio of 35. Insiders' interests are aligned with shareholder, as they own 77% of the company.
Finding non-bank financial stocks that are safe and cheap is as difficult as finding cheap industrial and services stocks right now. The three stocks I have mentioned appear to be worth further research and consideration.