by Tim Melvin | January 27, 2014 11:51 am
The financial papers and media have been a lot of fun this weekend. There are dire warnings about the stock market and lively discussions about the carnage in the markets.
As I pointed out last week, there are indeed a lot of a caution signs flashing in the markets with indicators like the Value Line Median Appreciation potential reading the level of market cap to GDP ratio indicating a somewhat overheated market. However, it is a bit early for talk of carnage in the stock market.
Last week was rough, with two triple-digit declines, but we’ve hardly reached the point where we can talk about the blood in the streets. We are still only about 3% off of all-time highs, and the market is not yet awash in bargain issues like it was back in 2008.
Momentum stocks like Netflix (NFLX) and Tesla (TSLA) were actually up on the week, and you can’t declare panic until the darlings join the party. The market may continue lower and create such conditions, but it is not yet time to aggressively buy stocks.
I sat down this morning and ran a screen looking for cheap stocks that have dropped steeply in the past week or so and may be nearing the point of serious consideration. In spite of the “carnage and destruction” hailed by the media, it was still pretty slim pickings. There were a few of these financially strong, dividend-paying stocks that trade below book value that got hit and should be considered by long-term value investors.
Baltic Trading (BALT) got slammed by 17% last week as the Baltic Dry Index continued its decline. The global recovery is going to have fits and starts and the sector will be quite volatile. Baltic Trading works in the spot market for cargo like iron ore, coal, grain, and steel products so the stock price will likely jump around with the BDI reading.
BALT stock is now trading at 60% of tangible book and yields 1.54. I would start very slowly with this stock, because you will likely get a chance to scale into the position on additional weakness in the shares.
Amco-Pittsburgh (AP) took a 5.5% hit in its stock price last week. The company is in some businesses that are very economically sensitive like cold rolling equipment for steel and aluminum manufacturers, heat-exchange equipment used in power generation and HVAC systems, and custom air handling systems that are used in commercial, institutional and industrial buildings.
AP also has exposure to China, which is a key concern with recent news of looming problems in that nation’s credit markets. However, this company has a rock-solid balance sheet, trading at just 87% of book value. And as a bonus, the stock is yielding 4.5% right now.
Nobody hopes the markets keep going down more than I do right now. I have a ton of cash in my portfolios, and would love a chance to buy a bunch of safe and cheap stocks at ridiculous prices. But a three-day decline is not a bloodbath or a broad buying opportunity.
The key measures of economic and market valuation I use still say we are a lot closer to rich than cheap right now. Don’t try to predict what the market is going to do, but instead take advantage of what the market gives you.
As of this writing Tim Melvin was long AP.
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