Still Finding Bargains for Patient Investors

• ByTim Melvin, RealMoney.com Contributor
• On 3:29 pm EDT, Thursday August 13, 2009

Like everyone else yesterday, I spent a good part of the day waiting for the Fed decision. It was mostly out of curiosity on my part, as I never trade on that type of news, preferring to focus on individual company fundamentals. The other reason was basic boredom. There was not a lot of news, and the market had opened up and stayed there all morning. I used the time to run stock screens and search for stocks that are cheap and have good prospects in an economic recovery.

My view on the market should be fairly well known by now, especially after yesterday's article on my perception of fair value for stocks. I believe we should be lower and expect that we will be. In spite of this, I never stop looking for cheap stocks and good companies.

It should be equally well known that if I had to make a living on my short- to intermediate term-market calls, I would be existing on bread and water while living in a tent. I am a stockpicker, not an index trader. From time to time I will find stocks that are simply too cheap not to buy. In addition, I always have a list of stocks that I want to buy if and when the market does go down. The time to prepare is before it happens.

I ran one of my basic Ben Graham screens yesterday, with a few twists. Since I stated that I believe the market multiple on earnings should be 13, that was my P/E ratio cutoff. I also wanted stocks that have been growing and can continue to do so. I screened for companies that have grown earnings at least 5% for the past five years and had analysts' expectations of 5% earnings growth going forward. To pass the screen, a company had to own at least twice as much as it owed and have a current ratio of at least 2. I am not a fan of debt and wanted to see only companies with sound balance sheets.

I found some interesting companies, not the least of which is Force Protection. The manufacturer of armored vehicles for the military has taken it on the chin in recent weeks. It lost a huge contract that many had expected it to win to build over 2,000 new vehicles for the Department of Defense. The second-quarter earnings report was terrible, with a revenue decline of 45% and earnings down 90%. The stock has dropped by 50% since that announcement.

The company is much smaller than its competitors, and it has a hard time keeping up with the big defense contractors such as Lockheed Martin. In spite of this, Force Protection continues to win enough contracts to stay cash-flow positive.

The stock is dirt cheap. The shares trade at just 6 time earnings, and even with lowered expectations, it is at just 8 times the consensus analyst expectation. Although book value was not included in the screen, Force Protection is cheap on that metric as well, trading right at tangible book value. It has almost $120 million in cash, and the current ratio is a healthy 2.3. The enterprise-value-to-EBITDA ratio is just 2.3, well below the 5 that I use to identify cheap stocks. Force Protection may never be a defense industry giant like some of its competitors, but as long as it continues to win a fair share of new and service contracts, the stock could easily find its way back to its 52-week highs.

Some of the better retailers found their way onto the list. Buckle has continued to do well in the teen and young adult markets. True Religion is knocking the cover off the ball with its high-end denim designs. Both stocks pass the screens, and both companies have strong balance sheets with no long-term debt. But they are not quite cheap enough to buy, with EV-to-EBITDA and price-to book ratios well above where I would like to see them. These go onto the "I want to buy at lower prices" list. I hope I get the chance, as they are both great companies.

Ituran Location is a stock I have written about before that makes the cut. The company provides vehicle location and telecommunication services. The location services division, which tracks vehicles and assists in recovering stolen cars and trucks, makes up 65% of the business. The company reported earnings yesterday, and like everyone else it had declining revenue and higher margins as a result of cost controls.

Ituran added subscribers in the quarter and was cash-flow positive. At 9 times earnings with little debt and a current ratio of almost 3, the stock clearly passes the safe and cheap tests. The shares also trade at a 4.5 EV/EBITDA ratio, so it passes that additional threshold as well.

At some point the economy will recover. When it does, stocks purchased with low valuations, strong balance sheets and decent growth prospects should reward patient, long-term investors.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider FRPT and ITRN 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!