Few Stocks Are Below Book With Low Debt

• ByTim Melvin, RealMoney.com Contributor
• On 12:30 pm EDT, Thursday October 15, 2009

Yesterday, I ran my regular Walter Schloss screen to see if any new ideas remained after the market run-up in recent months. This is one of my favorite screens and follows Mr. Schloss's advice to buy stocks below book value with low debt. In one of my favorite investing videos of all time, he tells Columbia students again and again how much he hates debt and how he does not like to lose money. Well, I don't like to lose money either. Thankfully, I have rarely done so investing in these types of stocks and holding them for the long term.

There are many different screeners available on the Web, and I use several of them. I find that relying on only one can cause you to miss some situations. Not all screeners cover the same universe of stocks, so I find it useful to run several each week. Yesterday, a friend sent me a link to a new screening site, and I took it for a spin. Sure enough, I came across a couple of Schlossian stocks that had not shown up on previous screens.

The first one I want to mention is yet another Chinese stock. Prior to this year, I had been very reluctant to invest in China for political and regulatory reasons. I have since learned enough to lessen, although not entirely eliminate, those hesitations. Noah Education is a company that sells interactive, multimedia learning aids in China. It sells handheld devices that allow students to download material that complements assigned textbooks in a wide range of subjects; it also sells electronic dictionaries. Earlier this year, Noah Education acquired Little New Star, a company that specializes in teaching English to Chinese children. Noah Education is an intriguing stock that is cheap on the numbers. The shares trade right at tangible book value, and the company is debt-free. Insiders own a little over 50% of the stock. Noah is cheap on an earnings basis as well, at just 11 times current and 8 times estimated earnings.

Another Chinese company that popped up on this screen is the only Chinese railway traded outside of China. Guangshen Railway offers transportation and freight hauling between Guangzhou and Shenzhen. As the economy recovers in that nation, passenger traffic is once again starting to climb. The railroad is also adding routes and stops to build passenger traffic. Guangshen links to the six other major Chinese railroads and has the only under-channel link to Hong Kong. Most expect China to be the fastest-growing economy on the planet in this century, and railroads will be a major beneficiary of this growth. At 90% of tangible book value, the stock is cheap, and the company has very little debt on the books.

Life insurance stocks have been weak in recent weeks, so I was not really surprised to see a lot of life and annuity companies on the list. Old favorites American National Insurance and National Western Life Insurance were on the list. Both have done fairly well this year but still trade below tangible book value. One of the cheapest insurance stocks that slipped through the cracks of some of the other stock screeners I have used is Kansas City Life Insurance , which trades at just 60% of tangible book value. The company sells traditional life insurance products as well as final expense policies for the elderly. It has about 1,400 agents and does business in 48 states as well as Washington, D.C. Kansas City Life has weathered the turmoil of recent years fairly well and still has an excellent rating from A.M. Best. In addition to the healthy discount from book value, the stock pays a 3.6% dividend.

Similar to all my other screens, the Schloss screen is turning up fewer new ideas right now. This one in particular is producing the lowest number of stocks in since late 2007. In addition, the discounts from tangible book are nowhere near as wide as they were earlier this year. To me, this is a sign that the market is getting overpriced, and I remain very cautious on stocks in general. I am moving slower and staying even smaller than usual when entering or scaling into my stock positions. On a lot of stocks, I am putting orders well below the market in an attempt to buy them at a larger discount to asset value.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Noah Education and Kansas City Life Insurance to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Buzz up!