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Remember the Margin of Safety

This article originally appeared on May 2, 2013 on Real Money. To read more content like this + see inside Jim Cramer's multi-million dollar portfolio for FREE. Click Here NOW.

I want to continue reviewing our list of stocks that are cheap on an asset basis but have fundamentally strong balance sheets that provide a margin of safety.

This assessment is based on the final chapter of The Intelligent Investor in which Ben Graham advises investors to make an adequate margin of safety the central concept of their investing approach. By focusing on what can go wrong, the question of what may go right is usually answered by time and patience with positive results.

Many have said that Graham's methods can't be used by individuals. My own work has found that it can't be used by huge funds, but individuals can still prosper with this approach.

I found 15 stocks that trade below book value and have high F scores and Z scores as measure of safety and that have market caps over $100 million. The first, Kelly Services (KELYA) we covered Wednesday. The second stock is Multi-Fine Electronix (MFLX), an electronics company providing electronic circuit boards and component assembly.

Business is not fantastic for the company as sales have fallen off a bit and margins are compressed in the ongoing global slowdown. However, the company trades for less than 80% of tangible book value and has an F-Score of 5 and a score of 3.3. The company has $130 million of cash on hand and no long-term debt, so they should be able to muddle through until there is a real economic recovery.

Seneca Foods (SENEA) is not exactly an exciting company. The company cans fruit that is then sold under the Libby's label and a few other brand names. They also pack frozen and canned vegetables of the green Giant label owned by General Mills (GIS). The company is profitable and has been on an annual basis for the past decade.

The company has an F-Score of 8 and a Z-score of 3.3, so there is a margin of safety and the potential for a solid return. The stock currently trades at 90% of tangible book value and is trading just 10% off the annual highs. I might wait for a bit if a selloff in the stock but it looks like a solid holding to me.

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