by Tim Melvin | July 25, 2013 10:59 am
It’s very hard to ignore short-term market movements and the noise of financial media. It took me decades, but I’ve learned that my opinion of market movements is just about as valuable as everybody else’s … not very.
What money I have made over the years has been earned by reacting to what the market does rather than trying to predict what it might do. The level of cash and stocks I carry in my portfolio is strictly a function of how many viable safe and cheap stocks I can find at a given moment in time.
That’s my bread-and-butter — safe, cheap stocks.
But the number of stocks that are cheap enough to consider buying is dwindling rapidly. Back in May I ran my toughest deep-value screen that looks for stocks trading below their tangible book value with solid balance sheets and improving business conditions. I found 15 that qualified as super-safe and super-cheap stocks. When I ran the same screen on Wednesday I found just four stocks that fit the bill.
One, American Greetings (AM), has received what I consider to be a take-under offer from its founders and has limited upside. Another is my favorite special-situation stock right now and is worthy of its own column sometime in the next few days.
That leaves two stocks that should probably be purchased regardless of your opinion of the economy, the stock market or any other external factor.
The first is Pericom Semiconductors (PSEM), a company that makes integrated circuits and quartz crystal products essential in the timing, switching, bridging and conditioning of high-speed signals essential to electronic devices from cloud computing to mobile phones. The stock is trading at just 90% of its tangible book value, with more than half its share price in cash on the books and investments. The company is focusing on higher-margins aspects of its business, and gross margins were up quite a bit last quarter. The company is using some of its excess cash to buy back stock — in the first quarter Pericom repurchased 609,000 shares of stock, and it still has more than $19 million of the authorized buyback to spend.
Kimball International (KBALB) has two major lines of business. It provides contract manufacturing services to the medical, automotive, industrial, and public safety industries, and it sells furniture for the office and hospitality industries. Right now the electronic manufacturing business is stronger than the furniture side, but the combined company is showing decent sales and earnings growth. The stock trades at just 90% of tangible book value and is worth considering for a long-term value portfolio.
There are fewer safe and cheap stocks around after the extended market rally, but these are just too cheap — and too safe — not to own.
At the time of publication, Melvin was long PSEM and KBALB.
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