by Tim Melvin | November 21, 2013 2:12 pm
The vast majority of the time I run screens, I’m looking for stocks trading below book value. These stocks are my absolute bread and butter … but once in a while you need to have a little jelly and jam as well.
I run a screen about every other month looking for “commonsense stocks.” I use the principles of Ben Graham’s 1976 suggestion on stock picking and look for stocks trading at reasonable PE and PB ratios that have low debt levels, high current ratios and dividends. This produces a list of stocks that are cheap, with solid balance sheets and the potential for a strong price recovery. Being a cheapskate who buys stock like I buy groceries, I also screen for performance and only consider those stocks that are down so far this year.
One stock that is on my list is Friedman Industries (FRD). The company is in the steel processing, pipe manufacturing and processing, and steel and pipe distribution businesses. It sells its products to steel distributors and companies that fabricate them into things like storage tanks, steel buildings, and construction equipment. This is just a plain, straightforward business that is very cheap at this point in time.
FRD sells right at book value and 13 times earnings. The company has more than 25%of the market capitalization in cash and has net current assets representing 85% of the market value. The business has been around since 1965, and in a stronger economy the shares have enormous upside potential. And the 3.38% dividend yield will pay you to wait for that recovery.
Ampco-Pittsburgh (AP) is another basic company whose shares are cheap right now. This company makes a wide range of products including rolled steel, HVAC coils, commercial and industrial air handlers, as well pumps for the refrigeration, power and marine industries. Business is just okay for the company, but sales, profits and stock price should recover nicely in a stronger economy. In the meantime, the stock trades right at book value and just 10 times earnings. And the 4% dividend yield makes AP worth the wait.
Owing good, basic business and collecting dividends along the way may not be as exciting as owning stocks like Google (GOOG), Tesla (TSLA) and Netflix (NFLX) that have wild moves and are in the media every day. However, it does have a margin of safety and decent dividend income.
It may not be popular but it is commonsense investing with a high probability of favorable results.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.
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