Five Stocks to Build a Portfolio Around

This weekend, amid football and one last summer go-fast boat expedition, the conversation turned to the markets. I was asked what I thought, and I gave my standard answer. (My bearish outlook is well known, so I will spare you the arduous task of reading it again.) I added my standard disclaimer that I was long some stocks I consider to be too cheap not to own so I was not overly concerned about missing a further rally. I got called out. "You always say that, Tim, but you never tell us what they are."

My friend was right, I realized -- I have not really collected the "too cheap not to own" stocks into one conversation or column. So today I'll discuss the stocks I would buy if I was putting together a portfolio today.

There are two caveats to this. First, I own all of these at slightly lower prices. Second, there are some stocks that I would buy that are just too small to talk about here, or anywhere else. Because of my viewpoint on the overall market, I would stay small and move slow in buying these names. I would have small positions and look to scale in over time as prices move down.

The first stock is Adaptec (ADPT - commentary - Trade Now). The data storage and software company has traded up to the level of net cash on the books, but it is still cheap. In addition there is activist pressure on the company. Steel Partners has said that the company is too small to remain independent and has launched a proxy fight to gain board seats. The activist fund is still buying stock and now controls 11% of the company. Institutions own 68% of the shares, and I suspect that many of them are going to be inclined to vote with Steel to unlock the value of Adaptec.

More on ADPT

Steel Partners Buys $3M Worth of Adaptec

Imation (IMN - commentary - Trade Now) is another data storage company that makes the list of "too cheap not to own." The company has gotten crushed over the last year, falling more than 60%; the stock currently trades at just 70% of tangible book value. Imation has a portfolio of valuable brands such as Memorex and TDK Life, and the stock is just too cheap not to own at these prices. The company has settled an important licensing and patent lawsuit and was profitable in the second quarter.

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At the time of publication, Melvin was long Adaptec, Imation, Babcock & Brown Air, Care Investment Trust and Brookfield Infrastructure Partners, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.