The Way of the Pig Farmer

• ByTim Melvin, RealMoney.com Contributor
• On Wednesday January 7, 2009, 11:00 am EST

Back in October, as the financial markets were melting down around our ears and the hedge fund liquidation trade was building to a crescendo, I recalled one of my favorite characters in all of financial literature: Mr. Womack, the pig farmer.

Introduced to the world by financial writer John Train in a 1978 Fortune magazine article entitled "How Mr. Womack Made a Killing," our stock-picking farmer was a wildly successful investor of the time who had a very simple formula. When the news was bad and everyone hated stocks, he drove to town to see his broker. He would buy a list of stocks that were financially sound, traded below $10 and paid dividends.

He bought stocks like he bought pigs for his farm. He bought when prices were down and no one else wanted any. As a bonus, according to Mr. Womack, pigs do not pay dividends! When the news was all cheery and wonderful a couple years later, he would drive back to town and sell them at huge profits.

Although this system seems to lack the finesse of modern portfolio theory and rigorous academic analysis, it worked very well for the man. I have used variations of it with a great deal of success throughout my career.

Right now seems to be a good time to revisit the Womackian approach and see what ideas we can find. I have a hard time putting together a bullish picture and a visit with the pig farmer seems in order.

During our last visit, the farmer approach looked at three stocks, and all three still qualify. CBS and El Paso are pretty much even while Motorola has fallen further, but all three can still be bought.

Another old favorite, Foot Locker is on the current list of cheap dividend stocks as well. The retail business is horrible as we all know, but the operator of more than 37,000 shoe and sports-related apparel stores is making all the right moves. Foot Locker has closed more than 100 underperforming stores and is reducing inventory levels, while adding the wildly popular Under Armor brand to 800 stores, which should help grow apparel sales. The company has very little debt and is still turning an annual profit in this difficult period.

Federal Signal has felt the effect of the recession. Most of its revenue is dependent on municipal spending and sales are down as a result. During tough times, orders for street sweepers and warning systems are just not a high priority. Orders for ambulances and fire and rescue trucks are being delayed.

The key word here is delayed -- while cities and towns may be willing to make do with old street and sewer cleaning equipment, the fire and rescue orders will be fulfilled. The company has a $182 million backlog in these products and much of that will be delivered in 2009. Lower raw materials prices should give the company some relief in the form of wider margins as well. In spite of the weak economy and reductions in municipal spending, Federal Signal is still profitable and is expected to be again in 2009.

I like Oxford Industries on the list of dividend-paying cheapies as well. Here on the island, Tommy Bahama is the costume of choice. Of course, we benefit from having access to the Tommy outlet store nearby but nonetheless, you see more Tommy Bahama clothes than any other brand around here. The stork has been weak as consumers have cut back on discretionary spending; it shows in the stock price, which is down 60% in the last year and more than 80% below its all time highs.

Oxford has more debt than I usually like, but interest coverage is 4.5 times and insiders seem confident they can manage the interest payments. They have been heavy buyers of stock in recent weeks. In addition to the Tommy Bahama line, Oxford has the Ben Sherman line of trendy clothing, which has been very strong for several decades. The company also has a strong portfolio of licenses including Nautica, Tommy Hilfiger and others. Oxford will be a market leader when the consumer starts spending again, and until then you get paid to wait.

When I am as bearish as I have been for the last year, I find it pays to go back and revisit some of the classic value investors and their tents of sound investing. Mr. Womack and his farming approach have worked for me for years and it is a good idea to pay attention to him during these turbulent markets.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Federal Signal and Oxford Industries 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.