Today’s stock market still presents a limited number of deep value opportunities for investors even after a 100% plus rally off the March 2009 lows. The overall market’s 24X CAPE PE ratio, as discussed by John Hussman and Robert Shiller, is higher than almost any point since mid-1929; so investors should be cautious in making additional allocations to equities at this point. That said, these 25 stocks appear to be good values that can perform well even if we have a correction in the overall equity markets. They also provide a good reference point in finding value if we eventually see a substantial sell off in equity markets. Investors should consider a covered call or cash secured put selling strategy to lower downside risk in these names as an alternative to bonds or to the more fully valued equity index funds.
(NWLI) – National Western Life was one of the few financial names that remained profitable in the 2008 downturn, yet the stock is still around 40% off the pre-recession highs. NWLI trades for around half of book value with an 11% earnings yield. NWLI is backed by large insider ownership, which means it has significant skin in the game and a strong incentive to maximize long term shareholder value. Inflation is a risk with the insurance businesses, however NWLI’s growing annuity business could be less affected due to skilled liability matching and the company's long history of sound asset management techniques.
(AHL) – Aspen Insurance is another insurance firm trading at a PE ratio of around 9X and at a 33% discount to book value. AHL has not budged since the start of the fall rally; however, the company posted a strong return on equity of over 10% last year and has maintained a healthy combined ratio in the midst of some pretty significant loss events over the past year, including the Deepwater Horizon spill and several earthquakes, which have hurt short term earnings. Falling rates in the Re-Insurance business, are a headwind for the company but a strong balance sheet should allow the business to weather the inflation and low rate storm.
(USU) – USEC, Inc. has invested nearly a billion dollars into its Pinkerton Ohio nuclear project, which is not guaranteed to move forward and requires a loan gaurantee from the Feds. However, the company has a margin of safety at half book value and a very low price to cash flow ratio. USU exhibits relatively large call option premiums which can be sold against the stock. Likewise, investors can look to sell the January 2012 $4 puts for a 10% or higher yield with a 30% or greater price cushion/added margin of safety.
(VOXX) – Audiovoxx is a perennial net-net stock which trades for around half of book and has exhibited positive earnings over the past year. I would look to buy VOXX in the mid $7’s and sell call options against the name as it could remain a net-net for several years to come.
(AOI) – Alliance One came to my attention as it is a top holding for both Seth Klarmin and for Aegis Value Fund and trades at a 20% or so discount to a growing book value. A high debt to equity ratio underscores the risks involved with the tobacco brokerage firm, yet a low price to operating cash flow and earnings multiple make shares interesting to the value minded investor. Cash flows from investing and financing activities are bit worrisome, as the company’s leverage ratios have increased in recent quarters.
(GNK) – Genco shipping and Trading has been hammered due to the falling Baltic Dry Index, however the company has posted consistent cash flows over the past few years and trades at a large discount to tangible book. The BDI recently ticked up a bit and with increasing piracy and tension in the Middle East, the BDI (and thus GNK) could finally catch a Bid.
(EXM) – Excel Maritime is another below book dry bulk stock that could benefit from a rebound in the BDI. EXM option premiums are fairly wide so I am short the Jan. 2012 $4 and $5 put options instead of owning the stock outright for a bit wider margin of safety in the name.
(AWX) – Avalon Holdings is a stock that trades for around ¼ of tangible book value, which consists of golf course assets in Ohio. I am not overly bullish on the underlying business, but the discount to intrinsic real estate value provides a deep enough margin of safety to make the stock a strong buy at current prices. Sure, the dual class share structure is an issue in unlocking shareholder value, but the discount is so wide that it likely does not matter to any significant degree.
(JASO) – JA Solar is the leader in Chinese Solar names and trades for ridiculously low valuations on cash flows and earnings. Covered calls are a good option here as the premiums are very large and investors can earn a 20-30% return if the stock goes nowhere over the next year.
(HAST) – Hastings is a good company in a bad industry – video games, discount books, electronics, and DVD sales and rentals are certainly being marked down by Wall Street. The discount to tangible book of nearly 50% and the 4X free cash flow metric make Hastings my favorite holding for 2011. Peter Lynch often looked for companies that could grab share and succeed in bad industries because they often post stronger earnings as competitors go by the wayside. BKS trades for a huge premium to book value and to the multiple on HAST cash flows, while customers far prefer the shopping experience at a Hastings (which is a steep discounter/wholesaler) to that of BKS and Borders.
(CSCO) – Cisco is a Magic Formula name which recently lost 20% of its value due to a soft quarterly earnings report. A price to forward earnings ratio of 10X along with an EV/EBITDA of 8 make CSCO a stock to watch for 2011.
(INTC) – Intel is another favorite of mine at 9X earnings and an EV/EBITDA of under 5X – Wall Street is constantly obsessed with “newness” of a particular business, and this obsession of hot money with speculative investments have left INTC shares undervalued in the current environment relative to the company’s growth rate and free cash flows.
(BBY) – Best Buy is not as cheap as Hastings, but the company does trade for just 9X earnings and sports and EV/EBITDA ratio of under 5X – typically, I would prefer a discount to book value in a stock like this, which is thought to be a Buggy Whip maker by most “growth” investors and Wall Street pundits.
(IM) – Ingram Micro is too cheap to ignore at 8X forward earnings and a small premium to tangible book value. Covered calls are an interesting option here, and the company appears to benefiting from the technology cycle that has lifted shares of companies in the cloud to 200 plus PE ratios.
(MOS) – Mosaic is one of the last stand alone pure plays on peak phosphate, so I like the name even though it looks fairly valued on traditional metrics such as earnings and cash flows. If the world runs out of fertilizer, MOS could be one of the best safe haven stocks for 2011.
(HUM) – Humana trades for around 8X earnings and has a virtual monopoly in healthcare. The new healthcare legislation has hurt the share price in the short run, but the fact is that Americans will be forced to do business with Humana with Obamacare.
(TEF) – Telefonica at 7.5X earnings and 9.4X earnings looks cheap and is held by Thornburg’s Bill Fries in their International fund. TEF is cheap on cash flows and carries a 6% yield. Investors should read Thornburg’s research on the name, as they believe growth in broadband in the developing markets should help TEF earnings going forward.
(TOT) – Total is another cheap foreign stock paying solid dividends. I believe the recent dip in Oil is a buying opportunity and that TOT is significantly undervalued.
(EGY) – Vaalco Energy is an American based company which operates oil wells in West Africa. The company is cheap on cash flows and is a member of the Magic Formula Screen, so look to sell puts or covered calls on the stock for a play on higher oil prices and a lower U.S. Dollar.
(FCX) – Freeport is dirt cheap on reserves with its 4 Billion pounds of Copper and Gold reserves, which alone are worth more than FCX’s entire market cap. At 8X earnings, the company appears to have a significant margin of safety on earnings as well as assets.
(S) – Sprint is now the low cost leader in cell phone service and should take market share in the increasingly commoditized phone service industry.
(CSTR) – Coinstar is up nearly 10% today on the news that the company is offering streaming, although streaming seems to be an over-hyped “story” right now on Wall Street. At a 6-7X EV/EBITDA CSTR is pretty cheap given historical growth rates. For occasional movie renters, CSTR provides a much better “no strings” type of service than rival Netflix (NFLX) and is around 300% cheaper on cash flows.
(MSFT) – Mister Softy has perked my interest with the recent fall in share price and trades for around 9X ex cash earnings for 2011. Whitney Tilson is very bullish on the name, and the company’s option premiums are wide enough that covered writing or call spread buying here makes sense.
In all, this is by no means a cheap stock market, but as a great trader once said “It’s a market of stocks, not a stock market.” These 23 stocks look to be good values despite the melt-up federally sponsored speculative rally that is going on in small cap indices and in “new” tech. The deficit situation is so insane that investors should look to hold hard assets such as farmland, bullion and silver as a Washington corruption and currency debasement hedge for the longer term. Those who blame speculators for rising commodity prices and not government largesse are not getting a clear view of the big picture. The off balance sheet liabilities are nearly large enough to bring down our economy already, yet we continue to spend more borrowed money than any government in the history of the World.
Disclosure: I am long AWX, VOXX, CSTR, S, NWLI, HAST, CSCO, MSFT, INTC, AHL, FCX, CSTR, TOT, TEF, MOS, JASO, EXM, GNK.
Additional disclosure: I am long BBY, short MDY
