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It's safe to say foreign markets are become more and more volatile as we near judgment day. If the bears are right, the recession we're likely to see in the next 4-6 months will be unlike any we've witnessed in our lifetimes. If the bulls are right, we should see a massive rally before US elections near. Either way, investors that are in the market for long term returns should be loading up on small-to-mid cap stocks that are getting slaughtered in the current state of affairs.

Before I get into the screen I used and the stock itself, let me tell you about what type of investor I am. I firmly believe that any investor (long-term, mid-term, or short-term) should set firm price targets at which they are willing to get rid of their positions. For all my positions, I use a simple but effective spreadsheet to calculate out 10%, 20%, 30%, 40%, and 50% returns for each of my positions. I then determine what kind of return I'm looking for with a particular stock and that becomes my target price. No matter what news I hear or what kind of bullish technicals I see, if the price hits my target, I exit my position.

With this particular stock, if the bears happen to be right about the coming sell-off, we'll have a chance to double-down to increase our long-term profits in coming months. If the bulls are right, we may hit our price target at which point we'll exit our trade and take one or two dividend payments depending on how long it takes for the markets to stabilize.

My screen is set for small caps (under $2 billion) with a P/B value of less than 1. Since most large caps are well analyzed, it's unlikely that they trade below book value unless there's a larger issue at bay. This is why we screen only for smaller caps. I'm also looking for something with a low P/E ratio (below 15) and a price to free cash flow ratio of below 15. This goes along with my first point. Large caps tend to trade above these numbers unless there's an issue with management or something of the like.

My last criterion and possibly the most important to a lot of you dividend investors is a high dividend yield with a low payout ratio. High yields are great but if a company is paying out a large amount of their cash flow, they likely aren't paying too much attention to investing it for future returns (such as buying up assets or investing in R&D). Also, if a company starts off with a high payout ratio, it won't be able to sustain dividend increases consistently which is usually a sign of weakening growth. For these two reasons, we're looking at a payout ratio of under 20% along with a yield of 3% or higher.

I get two resulting companies: Transportadora de Gas Del Sur (NYSE:TGS) and IRSA Investments and Representations Inc (NYSE:IRS). Before I dive into the research for a particular company, I always check the basics like yield, EPS, and insider activity. If nothing looks out of the ordinary, I will continue my research. Looking at TGS's last yield, I'd say it doesn't deserve any further attention from me. I see that their last yield was 81%. Needless to say, when something looks too good to be true, it is. This was confirmed after I saw that dividends were suspended in May of 2011.

IRS, on the other hand, seemed to qualify for a closer look with a yield of 11.86%. I started out my analysis with a quick calculation of its Graham value (you can look up how to value stocks, it's not the point I'm trying to make). Morningstar estimates a 5 year growth of 12%. To be on the safe side, I usually underestimate future growth significantly so I'll use a 7-10 year growth of 4% growth for my calculation of Graham value. It is currently trading at $7.35 while my Graham calculator shows a value of $16.09. That's well over a 200% upside.

The other valuation method I like to use is the reverse discounted cash flow (Reverse DCF) valuation. Basically, it determines what type of growth the market is expecting from the company to justify its current price. The R DCF value I arrive at is 12%, which is in line with analyst expectations. This means that if the company showed absolutely no growth in coming years, its current share price would still be justified. Keep in mind that if the value of the stock never appreciates, you still have an above average dividend yield to keep you happy!

Since the company seems to have passed my basic valuations, I like to take some time to learn a bit more about the business and the management. Through a quick scan, it looks like it's a fairly diversified real estate company that deals in both commercial and residential properties, largely based in Argentina. Furthermore, more than 50% of shares are held by insiders and there has been no negative insider activity in the past 24 months. When a company is held largely by insiders, I feel my money is safer because they have a larger interest in returning value to shareholders.

Another tool I use to gauge the effectiveness of management is their recent acquisitions, mergers, and expansions. In 2008, IRS acquired two other real estate companies which boosted its assets and thus, lowered its P/B value.

(click to enlarge)IRS Technical Analysis

Finally, I like to take a look at the technicals to determine when would be a good time to enter a position. Looking at IRS's chart for the past year, I've plotted the exponential moving averages for 52 weeks, 104 weeks, and 208 weeks. I tend to use much longer time frames for EMA than most people but, again, I'm looking at long term investing so it makes sense for me. The price has just crossed the 52 week EMA which may signal a new trend starting. I can confirm this by looking at the Moving Average Convergence Divergence (MACD) which shows that the 24 day moving average has already crossed above the 52 day moving average and it's about to break into positive territory. Finally, a quick glimpse at RSI shows that it's above 50 and below 70 which means it's in solid uptrend territory without being overbought. The ultimate oscillator shows that it's just slightly overbought which may get corrected in the next week or two.

I firmly believe IRS has a strong footing for solid growth and stable dividends whether the general trend of the market decides to go downhill or up. I believe it's a solid long position for long term investors and dividend investors alike and I think now's a great time to jump into the position.

Source: IRSA Investments and Representations: The High-Yield Small Cap You've Never Heard Of