The late Walter Schloss compiled one of the greatest track records in investing. For almost 50 years, Schloss averaged about 20% a year before fees for his investors.
He didn’t have a computer on his desk. The desk itself was in a converted closet in the offices of Tweedy, Browne in New York. He use the current editions of Value Line and the Standard & Poor’s stock guide to search for stocks. He had no complex equations or theories about stocks, sticking to what he learned in Ben Graham’s class at Columbia University.
Schloss bought stocks below asset value in companies that had very little debt and strong balance sheets. His preference leaned toward investing in companies where management had some skin in the game and suffered or enjoyed the same results their shareholder did when the stock price moved.
Choosing to ignore the daily news, Schloss once said, “I don’t like stress and prefer to avoid it, I never focus too much on market news and economic data. They always worry investors.”
Although not the most exciting way to invest in stocks, the Walter Schloss approach to the markets remains one of the most successful. Which is why I’ve compiled this ode of sorts to Schloss’ investing thesis, picking three bargains that Schloss himself would approve of.
Schloss-Style Bargains: Green Brick Partners Inc (GRBK)
Current Ratio: 5.2
Price-to-Book: 1
Debt-to-Equity: 0.1
If Mr. Schloss were still with us today I suspect he would own shares of Green Brick Partners (GRBK). The company started life as Biofuel Energy Corp in 2006 and used to build and operate ethanol production facilities in the Midwestern United States.
It exited that business in 2013. In 2014, investors led by David Einhorn of Greenlight Capital (GLRE) and Daniel Loeb of Third Point took control of the company and purchased JGBL Capital, a residential real estate developer.
Today, it owns four homebuilders in the Dallas area and one in Atlanta. Insiders have a lot of skin in the game, as they own 70% off the company. And before the jump in the GRBK stock price this past Friday, GRBK traded at just 88% of book value. Furthermore, the balance sheet is strong with a debt-to-equity ratio of just 0.1 and a current ratio just over 5.
Schloss-Style Bargains: West Marine, Inc. (WMAR)
Current Ratio: 4
Price-to-Book: 0.78
Debt-to-Equity: N/A
West Marine (WMAR) is another stock that I suspect would catch Walter’s eye. The company has 260 stores located in 38 states and Puerto Rico, as well as an e-commerce website reaching domestic and international customers selling what they call Water Life products.
This consists of boating supplies, gear, apparel and footwear for the boating crowd. Business is pretty good and the e-commerce segment in particular is growing rapidly, with year over year growth of 32.5%.
Right now, no one seems to care very much as the stock is currently selling at just 78% of book value.
What’s more, West Marine is debt free, and with a current ratio of 4, the balance sheet is strong. Insiders, too, have skin in the game, owning roughly 23% of the company.
Schloss-Style Bargains: Preformed Line Products Company (PLPC)
Current Ratio: 3.5
Price-to-Book: 0.86
Debt-to-Equity: 0.15
Preformed Line Products Company (PLPC) is another company that would be a strong candidate for Walter Schloss’ portfolio. The company makes products used in construction and maintenance of overhead and underground networks for energy, communications and broadband network companies.
This includes things like cable anchoring, control hardware and splice enclosures and mounting hardware for solar power installations. The company has been hurt by slower spending, particularly by energy customers, but the stock price now appears to more than reflect that weakness.
The stock is selling at 86% of book value at the current price. The debt-to-equity ratio is just 0.15 and the current ratio is 3.5, so the company is financially healthy
As of this writing, Tim Melvin was long WMAR. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.
