One of my constant themes is looking for cheap stocks with a decent business that you would not mind owning for several years, no matter what the price does in the short term. Recently, I wrote about Walter Schloss, who is the master of this approach and used it to beat the market for almost 50 years. In that article, I mentioned a couple of stocks that met his criteria and said I would return to the subject soon. Soon has arrived.
When I ran the screen for stocks that sold below book value, had very little debt and officers and directors owned a significant amount of the shares, I came up with a list of 39 stocks. I already wrote about two of them, Hilltop Holdings (HTH - commentary - Cramer's Take) and Elron Electronic (ELRN - commentary - Cramer's Take). Today, I went through the other 37 names and applied credit scoring to each company.
The idea was to come up with stocks that were not only cheap but also had staying power and a good chance of turning around in the future. As expected, since one of the criteria was low levels of debt, all of the companies had a good Z-Score. I also used the Piotroski scale described in an earlier article. This measure not only measures balance sheet safety but also indentifies signs that business conditions are improving and likely to continue to do so.
I came up with four companies that not only have a Z-Score over 3 but also scored at least 5 out of a possible 9 on the Piotroski scale. They are far from sexy companies; they are not in the economic sweet spot by any measure. They are, however, very cheap, financially sound and likely to be much higher in price a few years from now. I would not buy them for my trading portfolio, but they make a lot of sense for my long-term "buy it and forget it" account.
Investing Despite the Selloff, the Market Still Isn't Cheap 3/20/2008 10:40 AM EDT Stocks may look attractive in comparison to skimpy bond yields, but the market's P/E ratio isn't historically cheap.
At the time of publication, Melvin had no positions in the stocks mentioned, 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.
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