See Yourself in the Business

• ByTim Melvin, RealMoney.com Contributor
• On 3:00 pm EDT, Friday July 10, 2009

I have written a few columns this week about areas that I am exploring for cheap stocks and bonds even after the rally. This by no way means that I have changed my thoughts on the near-term direction of the market -- I still think the next leg in this market is down.

I am heartened by the fact that this is becoming very much a minority point of view. Everyday I am hearing of green shoots and less bad being good and I just find it impossible to embrace that point of view.

I watched yesterday as commentators and traders tried to turn the various reports into good news. If it was not so sad it would be funny -- 565,000 people filed for new unemployment benefits last week and the number of people receiving benefits rose 159,000 to more than 6.8 million people. Retail sales were weak with mall-based clothing stores taking the brunt of the damage.

Wholesale inventories continue to fall as distributors resist restocking in light of the weak economy. Just to pile on a bit, analysts at Citigroup issued a report that says that even after all the federal money thrown at the company, AIG equity might be worthless.

It is critical in this market environment to embrace the basic philosophies of value investing as laid down by Benjamin Graham in The Intelligent Investor: Investing is most successful when it is most business-like. View potential investments as buying businesses and the very first question you need to be asking before pulling the buy trigger is do I want to be in this business?

If you are going to buy Limited on the dip then you have to want to be in the clothing business. Most important, do you want to be in this business at this price? If you are buying debt issues, do you want to be lending to this company right now and what kind of asset and credit protection do you have?

There are some cheap stocks out there. I run screens almost every day and find stocks that are attractively priced. I have a suspicion they will get cheaper still and give me a better price to get into the business.

I have to make sure that the manic-depressive Mr. Market is working for me and not against me. Moving slowly and carefully and maintaining a large margin of safety on purchases has worked very well for me this year and I am reluctant to abandon that approach.

The next leg down will set up an enormous buying opportunity for long term investors. You may recall the story of our pig farmer Mr. Womack who has been the source of some very good ideas in the past year. The farmer was first introduced by author and investor John Train years ago and his policy of buying stocks that had plummeted in price, had sound balance sheets and paid good dividends still makes a lot of sense to me.

First, however, we have to ask the important questions.

When I ran the screen a few names jumped out at me yesterday. Gentex is one of the very few auto suppliers where bankruptcy fears do not enter the picture. The company has no debt and $333 million in cash, about one-fourth of the stock price.

As you would expect, business is awful. The company has a large exposure to General Motors and I have hard time seeing how that manufacturer increases sales any time in the near future. The stock pays a good dividend and yields a little over 4% at current levels.

If I ask the basic question, however, I do not want to be in this business at this price. At a lower price I probably will want to be in the auto parts business for the long haul and Gentex is probably best in breed.

Care Investment Trust is a business I want to be in at the current price. The REIT invests in medical properties and mortgages. They directly own 14 properties, the bulk of them long-term-care assisted living and Alzheimer's facilities all of which are net leased to the operators.

It also has partnership investments in four other such facilities and no medical office buildings. The $138 million loan portfolio has never had a default and all loans are current. The company has paid off its warehouse credit line and built up cash.

I am buying the business for half of tangible book and getting a double-digit dividend yield while I own the stock. The balance sheet is solid with debt to equity levels far below most REITS. In fact, it passes the Graham test of owing twice what it owes and having no significant debt maturities until 2015.

Our population is aging and health care facilities will be in demand for decades to come. I am comfortable buying shares at current prices and holding for years.

By keeping it business-like, I can deploy cash into stocks like Care or net-cash situations like Actions Semi and Silicon Graphics that I mentioned yesterday.

I am keeping my positions small consistent, with my market view. If I am right I get to buy more lower. If I am wrong about the market, I own stocks that are so cheap I will still do very well in a rally.

Buzz up!