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How to Be Choosy With Deep Value Stock Picks

NEW YORK (TheStreet) -- Today it's back to business, and I am thankful for that. Whether or not you were happy with the election results last night, I for one am ready to move on and let the chips fall where they may.

(Just for the record I was wrong on two of my three election predictions, and although that's a decent batting average in baseball, it's not so decent when it comes to elections. Congratulations to my fellow contributors at TheStreet who nailed last nights' results.)

The truth is that deep value, at least where I look for it, is a bit scarce these days, and I am not finding a whole lot of new opportunities. In fact, I'm seeing some of the same companies popping up on some of my deep value screens that were there two years ago. Although this does necessitate that I dig deeper, it does not mean that I'll be buying just for the sake of buying.

I often look at companies trading for less than book value, and many of the screens I employ utilize low book value as criteria in one form or another. For instance, more often than not, net/nets (companies trading at less than net current asset value) also trade for less than book; that's just the nature of the beast.

But book value by itself often includes intangible assets, such as goodwill, patents, trademarks, and other assets that may or may not have any economic value. In the case of, say Coca Cola (KO), intangibles may actually have a great deal of value.

But in other cases, it's difficult to make that argument. Stripping out intangible assets from book value, and identifying companies trading for less than tangible book value per share can provide some interesting candidates for further analysis.

Beyond searching for companies trading below tangible book value, I also add the following criteria:

  • No financial names
  • Long-term debt to equity less than 50%
  • Companies must be profitable on a trailing 12-month basis
  • Minimum market cap of $100 million

This screen actually reveals dozens of candidates. High on the list in terms of market cap is Corning (GLW), which has been all but rejected by the market. Corning currently trades with a price-to-tangible book ratio of 0.84 and a price-to-earnings ratio of 9.5 (based on trailing earnings). This name, which also yields 3.1%, is showing up on a lot of value screens these days.

The energy sector is represented by Hess (HES), which trades at about 0.91 times tangible book, and trades at 15 times trailing earnings.

Oil-services name Rowan (RDC), which trades with a price-to-tangible book ratio of 0.9, and Patterson-UTI Energy (PTEN) also made the cut.

HES Tangible Book Value Per Share ChartHES Tangible Book Value Per Share data by YCharts

In the always interesting world of small-caps, we find a somewhat forgotten name, workforce solutions company Kelly Services (KELYA) (0.83 times tangible book), and greeting card name American Greetings (AM) (0.83 tangible book).

Perhaps the most interesting name, at least in terms of the company's business, is Omega Protein (OME), which harvests Menhaden, an oily fish also known as "bunker" for use in Omega 3 vitamin supplements (which are promoted as reducing cholesterol and reducing the risk of heart disease), and fish meal, which is used for animal feed.

Fish meal represents about two-thirds of company revenue. This company has been very volatile over the years, as storms and the Gulf oil spill have wreaked havoc on the company's facilities and ability to fish (the company has been compensated by insurance and oil-spill funds). There also have been limitations placed on the Menhaden harvests in some areas. There's also been some controversy recently as to whether fish oil supplements are actually effective in fighting heart disease.

I've owned this name in the past a couple of times, and it has never been boring.

HES ChartHES data by YCharts

Happy hunting!

At the time of publication, Heller had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stock quotes in this article: GLW, HES 
Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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