Screening for Asset-Rich Bargains

• ByTim Melvin, RealMoney.com Contributor
• On 11:00 am EDT, Friday May 29, 2009

I wrote yesterday about the necessity to run screens every week, no matter what is going in the world. In addition to the Benjamin Graham screen, the other screen I run without fail every week is the Schloss screen.

I have talked about this screen often. It is based on an interview that the legendary Walter Schloss did a few years back in which he professed that he liked stocks that trade below book value, have little leverage and have insider ownership.

I run a screen for this every week, looking for companies trading below book that own twice as much as they owe and whose insiders are partners with investors. It is by far my favorite stock screen, as I prefer investing in asset plays. I have always found that it's harder for a company be excessively creative on the balance sheet than on the income statement.

As with the Graham screen, the results the Schloss screen give me information as well as ideas. When I ran the initial screen, I got over 1,000 names. This is pretty high on a historical basis. However, when I added some market-cap and liquidity constraints, the number dropped to 244. That is still a little on the high side, but it tells me that microcap is the cheapest segment of the marketplace. It also makes me suspect that much of the recent rally was based on liquidity and not fundamentals.

My other observation is that the list produced by the screen was a confirmation of yesterday. I am seeing more Chinese stocks on my list that ever before. I have never purchased a Chinese company, as I worry about accounting and political risk, but I'm rethinking this. I am going to refer to Brittany Umar, who does the "China Watch" video series over on TheStreet.com, to see if she can point me to someone who can increase my comfort level. China is an ever-growing part of the global economy, and buying asset-value stocks in that nation seems to be an idea worth exploring.

Although the Schloss list shows a drastic reduction in bank stocks, just like the Graham list, there were a lot of insurance companies still trading below book value. Bermuda-based bond insurer Assured Guaranty is on the list. If there is a more controversial business today, I cannot think what it might be. Assured is still profitable, but it has some exposure to the residential mortgage market.

I have one reason for buying this stock. Wilbur Ross is Assured's largest shareholder, and I have coattailed him many times over the years and never lost a dime. It has been a wild ride at times to be sure, but over the long term the twists and turns have all worked out favorably. Ross has a knack for picking companies out of the trash heap when no one else wants them and holding them for profit. I traded this stock several times last year, and it is going back on the watch list for an opportunistic entry.

Audivox remains on the list as well. This company may be the ultimate value stock. The shares trade at just 50% of tangible book value and at 20 cents on each dollar of revenue. It is in a horrible business during a consumer recession. The consumer and mobile electronics markets are weak and will not improve until the economy does. The company also has enormous exposure to the automotive business through its mobile division.

However, Audiovox has cash on hand that is equal to 60% of the current stock price and should be able to weather the tough times. I take note that the stock is owned by three of the best classic asset-value funds I am familiar with: Seth Klarman at Baupost, Donald Smith & Co. and the Kahn brothers.

Several of my old reliables are still on the list. Cincinnati Financial makes the cut again. The turmoil in the financial markets has not spared this company, and to make it worse it has about the twice the exposure to the equity markets of the average insurance company. This has been a negative so far this year, but it may be a positive in the years ahead. The company is one of the most conservative underwriters in the business, and it should do well in years ahead. The shares are at 90% of tangible book and should be on your watch list.

Two cash-rich favorites are Sycamore Networks and Adaptec. Both trade for less than cash on the books and are worth buying for the long term regardless of market conditions. Hilltop Holdings is another less-than-cash stock that is on the list that I believe can be purchased.

We are facing an interesting week ahead. It is highly likely that General Motors will file bankruptcy. Although it is expected, I am not so sure this event is priced into the market right now. I expect more bank stock weakness as well. Be patient, but have a list of Schlossian stocks to start building a postion during market weakness.

Buzz up!