Diamonds in the Rough

Finally, it's over. It seems the last several weeks of 2008 were spent just waiting for the year to end. We all know what the year was like, so I see no point in rehashing it here. It is a new year and time to look ahead.

The key to 2009 is going to be real estate and jobs. The decline in housing prices must stabilize for the markets to fully recover in 2009, which probably will not happen until the second half of the year -- there are simply too many foreclosures still coming on the market for prices to stop declining.

Ultimately, the best cure for low prices is low process and we will see buyers return and prices stabilize, but we are not there yet. The same applies to the unemployment picture -- we will see more cutbacks and layoffs in the first quarter as corporate earnings continue to decline.

Having said that, there are a lot of cheap stocks out there right now. I ran a simple screen Wednesday morning combining a few Ben Graham attributes such as low price-to-earnings, low debt and low price-to-book value. I also searched my universe of stocks for those who fit all my criteria but also had double-digit earnings growth the past five years.

Many of the former leaders of the oil stock made the list. These stocks have been sold heavily in the last quarter as energy prices fell and hedge funds dumped stocks to deleverage their portfolios. Some of them are at levels I find too attractive to pass on.

Rowan Corporation (RDC - commentary - Cramer's Take) has been one of my favorite stocks for several months now. There will be added pressure to unlock value from activist investor Steel Partners as it assumes a board seat this month as a result of an earlier agreement with the company; Steel has been buying stock as well.

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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.