A look at the headlines of the past week is a glaring example of just how imperfect markets can be at times. Janet Yellen told us things were good, except of course for the things like full-time, high-paying jobs that aren’t very good. The situations in the Ukraine and the Middle East continue to flare up on a regular basis.
Trying to predict what will happen — and more importantly, how markets might react to various pieces of political and economic news — is frustrating at best, and usually just impossible. In such an imperfect world, all we can do is keep our heads down and look for cheap stocks that have an adequate margin of safety.
One way to find such stocks is using a screen I developed years ago that searches for what I call “perfect stocks.” Perfect stocks are profitable companies that pay a dividend, trade below book value and have a margin of safety in the balance sheet. We want solid companies with low debt levels and high current ratios available at bargain prices. I cannot predict the future of market movements, but owning companies that are cheap and strong enough to survive until they come back into favor is a solid plan for achieving strong returns.
Ampco-Pittsburgh (AP) is a great example of a perfect stock for an imperfect world. The company makes forged hardened steel rolls used by steel and aluminum producers and heat-exchange coils used in the power generation, automobile and HVAC industries. It is highly unlikely that this company will ever be the lead story on the financial news networks but it is safe and cheap.
Ampco has a miniscule debt-to-equity ratio of just .06 and a current ratio of 3, so it has the resources to keep the doors open and the lights on until conditions improve. The company is profitable, and AP stock trades at just 88% of book value. As a bonus, you get paid to wait for higher prices with the 3.5% dividend yield.
CSS Industries (CSS)
CSS Industries (CSS) is an even less exciting business. This company makes greeting cards, ribbons, gift tags bags and other accessories for gift-giving. It also makes journals, photo albums and other such accessories. We all buy this stuff from time to time for graduation gifts, wedding gifts and other occasions but I do not recall for one moment ever wondering who made these products.
It is highly unlikely that this company will ever grace the cover of the weekly financial magazines, but CSS has a good business and the stock is safe and cheap. CSS stock trades at just 92% of book value, with no long-term debt. CSS Industries shares currently yield 2.4%, so you are collecting cash until the business improves along with consumer spending.
Rocky Brands (RCKY)
Given their focus on outdoor and work-related footwear its highly unlikely that I will ever own a pair of boots or any clothing from Rocky Brands (RCKY). But I’m told by people who actually engage in such activities that the company make a good product.
The company is profitable and has a decent balance sheet with a debt-to-equity ratio of just 0.33 and a current ratio of 2.4. The stock trades at 85% of book value and yields 2.7%. RCKY is not the most exciting company in the world, but the shares appear to be safe and cheap.
Note: These stocks all trade at very low volumes, which means they’re especially susceptible to sudden rises and falls. Protect your investment with stop-losses and limit orders.
We live in an imperfect, unpredictable world and nowhere is this more prevalent than the stock market. The best way to protect yourself from imperfection is to own stocks that are close to perfect as possible
As of this writing, Tim Melvin was long AP.