For my final column of 2015 I could rehash the year, but I think I have done that in the past few weeks. I was dead right about community banks. I was mostly right on REITs and insurance companies. I was very, very wrong on natural-resources stocks and just a tad or 50 early on energy. We had a market-beating return by focusing mostly on the banks and holding lots of cash, but this year isn't going up on the Wall of Fame. It was a tough year to be a value investor.
I could make some very specific predictions about the New Year, but in all honesty I would rather eat okra and broccoli washed down with strawberry Ovaltine. It would produce about the same level of meaningless regurgitation. As John Kenneth Galbraith once remarked, financial forecasters exist primarily to make astrologers look good. It is a pointless exercise.
Instead, I will take advantage of some of what I have learned this year to pinpoint some super-cheap stocks that may have large returns next year. Looking at the work of Tobias Carlisle, Wesley Gray and Aswath Damodaran, there is a growing body of evidence that price-to-book value works best for financial companies and REITs, while the enterprise value to earnings before interest and taxes ratio is best for non-financial companies. Instead of wasting your time and money by rehashing or predicting, I will embrace my inner Mickey Mantle, cock back the bat and look for stocks that are super-cheap on these multiples that may give us big returns in 2016.
Looking at financials first, I find that shares of Cowen (COWN) are back at just 60% of book value. The investment bank and investment manager is a company I am very familiar with and have owned with good profit outcomes in the past. While the business is not doing too badly, it got hit with some mark-to-market losses in the third quarter and there has been some strong selling in the stock in recent months. Investment banking, equities trading and asset mangment all did well in the quarter. The company is buying back stock and repurchased 3.6 million shares for $19.1 per share in the third quarter. It also raised the current authorization to $25 million. I am a big fan of management and think the stock can recover nicely next year.
First BanCorp (FBP) is one of the remaining Puerto Rican banks. To put it bluntly, Puerto Rico is a mess that will take some time to untangle. However, there is a ton of very smart money that thinks this will all work out for the bank. Oaktree (OAK) and private equity firm Thomas Lee still hold almost 20% each of the bank. EJF Capital has been a buyer recently, as was Joseph Stilwell. You don't have to risk a lot on First BanCorp because if this all works, the bank will shoot up several multiples of the current stock price over time. The stock currently trades at 42% of book value, which is right around the level at which I bought distressed European banks in 2011.
Moving onto the non-financial stocks, the bottom of the low EV/EBIT stock is littered with for-profit education stocks. When I initiated my short in Apollo Education (APOL) back in 2010, I said the for-profit education companies were more of a student loan processing scheme than education companies. I said this industry would be a buy when most of them were trading at single digits, and we are pretty much there. I also said the one stock I hoped would get caught up in the selling and collapse so I could buy it was Universal Technical Institute (UTI), and that has happened.
Universal Technology is not peddling college degrees. It is teaching people who want to be professional automotive, diesel, collision repair, motorcycle and marine technicians. Not everyone needs a philosophy or Eastern studies degree, and I know a lot of folks in these industries who have done very well over the years without ever worrying about the Dow Jones Industrial Average or commitment-of-traders reports. The stock is trading with an EV/EBIT ratio of just 4.9 at the current price.
I am quickly running out of room, but the second non-financial stock that is very cheap going into 2016 is Freight Car America (RAIL). The company makes (obviously) railcars. It also supplies railcar parts and leases freight cars. It is not a fantastic business in a slow economy, but the company is profitable and has a decent order backlog going into the New Year. The stock has an EV/EBIT ratio of just 3, so the stock is very cheap on this measure.
Note that I have not bought these yet as I am waiting for the first big down move in 2016 to commit any more cash, but I am a big fan of all three for the next 12 months and beyond.
Have a great weekend and strong 2016.
