Five Stocks to Build a Portfolio Around

• ByTim Melvin, RealMoney.com Contributor
• On 12:33 pm EDT, Tuesday September 22, 2009

This weekend, amid football and one last summer go-fast boat expedition, the conversation turned to the markets. I was asked what I thought, and I gave my standard answer. (My bearish outlook is well known, so I will spare you the arduous task of reading it again.) I added my standard disclaimer that I was long some stocks I consider to be too cheap not to own so I was not overly concerned about missing a further rally. I got called out. "You always say that, Tim, but you never tell us what they are."

My friend was right, I realized -- I have not really collected the "too cheap not to own" stocks into one conversation or column. So today I'll discuss the stocks I would buy if I was putting together a portfolio today.

There are two caveats to this. First, I own all of these at slightly lower prices. Second, there are some stocks that I would buy that are just too small to talk about here, or anywhere else. Because of my viewpoint on the overall market, I would stay small and move slow in buying these names. I would have small positions and look to scale in over time as prices move down.

The first stock is Adaptec . The data storage and software company has traded up to the level of net cash on the books, but it is still cheap. In addition there is activist pressure on the company. Steel Partners has said that the company is too small to remain independent and has launched a proxy fight to gain board seats. The activist fund is still buying stock and now controls 11% of the company. Institutions own 68% of the shares, and I suspect that many of them are going to be inclined to vote with Steel to unlock the value of Adaptec.

Imation is another data storage company that makes the list of "too cheap not to own." The company has gotten crushed over the last year, falling more than 60%; the stock currently trades at just 70% of tangible book value. Imation has a portfolio of valuable brands such as Memorex and TDK Life, and the stock is just too cheap not to own at these prices. The company has settled an important licensing and patent lawsuit and was profitable in the second quarter.

Babcock & Brown Air is one of my favorite stocks. One would think the aircraft leasing business would be terrible right now, but Babcock has all but one of its aircraft on lease right now and is generating cash flow and profits. The company is actively buying back debt well below face value and has bought back shares as well. The average lease still has five years left to run, so Babcock is in an excellent position even in a weak environment for airlines. The lease portfolio is well diversified, spread among 36 different airlines in 19 countries. The stock sells at just 60% of tangible book value and yields more than 8%. It is well off the lows, but I would still buy a little here if I were building a new portfolio.

Care Investment Trust is another stock I would buy if I were starting from scratch, even after the market run-up. The REIT owns a portfolio of health care facilities, including assisted-living and Alzheimer's facilities, that are net leased, as well as joint ventures that include medical office buildings. The company also has a floating-rate loan portfolio of $102 million with no delinquencies or defaults. In fact, last quarter Care Investment received $35 million as a result of prepayments of two mortgages -- an unusual event on the current credit and real estate markets resulted in a much stronger balance sheet. The company has $53 million of cash and no debt maturities until 2015. At 60% of book value, I would be a buyer. The stock also has a great yield, paying a little over 9%.

I would also buy a little Brookfield Infrastructure Partners . This is a great collection of infrastructure-related assets that have tremendous potential in a global economic recovery. Brookfield also owns electricity transmission lines in Chile and Canada and has social infrastructure investments including arenas and convention centers in the U.K. and Australia. The timber business has been the biggest drag on the company as worldwide timber demand has dried up in the housing crisis. The other divisions have strong operation and are more than supporting the timber business during the recession. When timber recovers, this stock could be a home run. Buying quality assets that kick out a better-than-6% dividend yield at 70% of tangible book value just makes a lot of sense to me, regardless of my market outlook.

I own all of these and expect to hold them for a long time, barring a takeover or other asset conversion event. These are some of the very few stocks I would buy for a new portfolio today. As always, I would stay small and move slow until market pricing improves.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Adaptec, Imation, Babcock & Brown Air, Care Investment Trust and Brookfield Infrastructure Partners 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!