Screens Are Screaming Selloff

• ByTim Melvin, RealMoney.com Contributor
• On 2:00 pm EDT, Thursday August 20, 2009

You can put me firmly in the Insana camp on this market: We are ripe for a selloff. I am not saying this because of the economic reports I am seeing. My stock screens are screaming that the market is too high.

When I ran my stock screens yesterday I came up with very short lists of stocks that qualified as bargains. When this has happened in the past the markets usually pulled back within a short period of time.

I ran a screen for debt-free companies trading below book value with insider ownership and came up with just 24 names. That is the lowest in three years. All of the stocks that popped up have been on the list for some time, as virtually no stocks have fallen enough in recent months to make the screens.

Many of the stocks that are still on the list have made impressive moves off the bottom. Stocks like New York Magic and National Western Life have doubled off the bottoms. They are both still too cheap not to own if you do not already own them but I would look to buy on a market correction. The market for deep-value, asset-based investing has shrunk rapidly in the past three months.

My basic Ben Graham earnings screen is also not producing the results it did earlier this year. In fact, if you back out REITs and financials there are only a handful of companies left. Most of those are energy-related companies like ENSCO and Baker Hughes that have risen more than 50% off their lows this year. Long term, energy is one of the largest values in the market but my cautious side would wait for a pullback in oil and stocks before buying.

Looking for stocks below book value with strong balance sheets that pay decent dividends returned just 43 names this time. This list of stocks still contained many REIT and financial stocks. Only one of the REITS, Care Investments, is worth buying. I like the company's portfolio of healthcare facilities and strong loan portfolio.

Long-time favorite Prospect Capital is still on the list and is at prices where I would be a buyer. Other than those two, none of the remaining companies passed further review of the underlying business.

I got a return of 43 names when I ran the Triple Six screen. This is the screen of companies that trade at 60% of book value, a PE of 6 or less with at least a 6% dividend. No debt or balance sheet criteria are used. Almost all of the stocks on the list were either REITS, energy MLP's or shipping companies.

Prospect is on this list as well as is recent recommendation Babcock & Brown Air Group. Both of these are still worth buying, but the rest of the list is highly leveraged real estate and energy plays that I would pass up at this time.

My list of net cash stocks that I like is down to just three names. I have owned Silicon Graphics, Actions Semiconductor and Adaptec for most of the year and I expect to own them for a long time to come.

I would have to check the history books to be absolutely sure, but I do not recall ever losing money on a stock that I purchased for less than cash on the balance sheet and I do expect to lose on theses three. My only concern about any of them is that Actions is a Chinese company and I am not an expert on China or Chinese stocks by any stretch of the imagination.

My methodology is forcing me out of the market. There are no bargains being created and many of the stocks I purchased earlier this year have risen to the point that I consider them overvalued and have sold or am ready to sell them. This confirms my view of the economy and market and I am comfortable reducing my exposure.

I have never gone to 100% cash or been net short in my life and I do not think I ever will be. My approach demands that if I find something too cheap not to own, I buy it. There are always some cheap and safe issues in the market but as prices cling, I find that the reduced number of bargains is a strong indication that the market is topping. While my predictions for the economy and stock market may be and have been wrong, the relationship between price and valuation has never failed me.

Buzz up!