ScreenShot: Quality at a Discount

• ByTim Melvin, RealMoney.com Contributor
• On Friday November 7, 2008, 11:15 am EST

Today is stock screening day at Chez Melvin. I expected the market to sell back down after the somewhat euphoric rise into this week's election, and I wasn't disappointed. I'm not sure that it's over or that we won't retest the lows or even break them. I have pointed out in the last couple of weeks that a lot that can still go wrong and take the stock market lower.

In the face of all this uncertainty, I run my screens every week to see if I can find stocks that are just too cheap not to own. I found that for the most part, the lists of stocks that hit my Schloss and Graham screens (my two favorites) remained fairly stable, with no surprising or interesting additions.

I ran the screen for S&P 500 stocks under tangible book with low debt and found that although the list has shrunk since the October lows, one interesting name has joined the list. Northrop Grumman has fallen to the point where it makes the cut. The popular perception is that defense stocks will do poorly under an Obama administration. That may well be true, but a glance at recent news shows that Northrop is winning contracts almost daily. The stock trades at 9 times earnings and below tangible book value. This appears to discount the Obama slowdown. The shares have not traded below book value since 2004, and the current P/E ratio is about half the 10-year average.

I am not quite ready to buy Northrop outright, but should it decline a little more, the December puts might be an interesting trade. Two of my current favorite stocks, Ashland and Cincinnati Financial , are still on the list and they are among the stocks that you can just buy on down days and hold for years.

I realized today that I had not run my "perfect stock" screen in some time. This screen is simple: I just combine the Schloss and Graham screens and add insider buying. As long as you are not running a huge fund that has to stay invested, there is no law compelling you to buy stocks. There are no rules that say you have to try to match the index or buy stocks that do not fit your criteria. You can wait for the perfect pitch to swing. This screen is simply an attempt to find the perfect pitch on Wall Street. I define this as a company that trades below tangible book value, is profitable, trades below 9 times earnings and has seen insiders buying shares. I count it as a bonus if the shares are being bought by noted value or activist investors.

I found some interesting names on this screen. Most are in very unpopular industries that are expected to do poorly in an economic slowdown. One such is Ameron International . Long term, this is a business that should very well. Ameron makes light poles and pipes for the petroleum industry, as well as water pipes. If there is increased infrastructure spending as economic stimulus in the next few years, this company should benefit.

Third-quarter earnings were down a little year over year as the water and construction pipe businesses were weak. Looking out a few years, the company's windmill tower business could be a significant source of profits. The shares are at a third of their 520week high, trading at 7 times earnings and just 90% of tangible book value. The company has very little debt, and almost 40% of the share price is cash on the balance sheet. I would like to see some more enthusiastic insider buying, but Ameron could be an interesting stock to own for the long term.

The insider buying at Convergys was much more enthusiastic. Fourteen insiders, including activist hedge fund Jana Partners, have purchased more than 4.4 million shares in the past few months. The company provides customer service, human resources, outsourced services and billing to corporations. Convergys recently reduced its earnings outlook for the year, and the shares fell more than 50% on the news. Convergys now trades for about 70% of book and just 6 times the reduced earnings expectations. There has been talk of spinning off the information management business to unlock shareholder value; Jana owns almost 10% of the shares and is thought to be pushing the idea. A financial adviser has been hired to evaluate a potential transaction.

As usual, I running out of space and cannot comment on every stock that makes the screen. I will note that two stocks I have written about before -- Bronco Drilling and Endurance Holdings -- make the short list. I have not been shy about stating that I am still cautious because of overall market and economic conditions. In spite of that, many of the stocks on this list will be a lot higher in five years.

Below is a chart of the stocks that made the cut from my "perfect stock" screen. I hope you can find some interesting ideas for more research.

Company Name	Ticker	Market Cap (millions)	P/E (trailing 12 months)	Debt/Equity Ratio	Price/Book	Insider Buyers (12 weeks)
Ameron International	AMN	448.68	7.58	0.11	0.93	2
Amer Cap Ltd	ACAS	2978.8	4.53	N/A	0.52	2
American Safety Insurance	ASI	102.55	4.4	N/A	0.49	3
Axis Capital Holdings	AXS	3837.61	7.77	0.1	0.94	1
Bronco Drilling	BRNC	204.55	7.24	0.01	0.5	4
BE Aerospace	BEAV	1238.1	5.76	0.11	0.8	8
Conseco	CNO	325.12	2.55	0.24	0.1	6
Century Aluminum	CENX	663.62	2.22	0.15	0.39	1
Ennis	EBF	288.2	6.73	0.21	0.8	6
Convergys	CVG	906.37	6.05	0.18	0.73	23
First Mercury	FMR	212.51	6.2	0.25	0.79	1
Gladstone Investment	GAIN	107.97	6.43	N/A	0.45	5
Endurance Specialty	ENH	1672.82	3.99	0.18	0.67	1
Hallmark Financial	HALL	131.72	4.72	N/A	0.69	7
Hercules Tech	HTGC	276.18	7.31	0.24	0.69	4
ICO	ICOC	112.56	6.66	0.25	0.99	7
Kapstone Paper	KPPC	124.77	5.56	0.18	0.76	7
Oil States International	OIS	1141.38	4.55	0.24	0.89	1
Annaly Capital	NLY	7135.79	6.31	N/A	0.88	2
Prospect Capital	PSEC	353.65	6.11	N/A	0.82	32
RTI International Metals	RTI	311.16	4.05	0.03	0.5	4
Seabright Insurance	SEAB	215.54	4.87	N/A	0.7	1
EW Scripps	SSP	259.46	1.01	0.2	0.13	1
Validus Holding	VR	1230.21	3.06	0.15	0.6	2
XL Capital	XL	1803.19	1.47	N/A	0.21	7
Warren Resources	WRES	265.21	5.64	0.22	0.7	1

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Ameron International and Bronco Drilling 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.