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Melvin: Keep It Simple

The last couple of weeks have been an ocean of potentially market-moving noise.

The situation in the Ukraine has gotten a lot of attention and spooked the markets, especially in Europe. The now-infamous six-months statement by Fed chief Janet Yellen this week scared some people. The "weather ate my economy" excuse has gotten a good deal of play as well in discussions about everything from FedEx (FDX) to housing starts.

Each and every day the market is open you could find some piece of news to use as a valid reason to buy or sell stocks and bonds. If you pay real close attention to the news swirling around the markets and try to correctly guess the market's reaction, I think you would be sedated and sent somewhere calm for a good, long rest in very short order.

I am something of a news junkie, so I have to force myself to pay attention to the only thing that really matters when investing in the stock: is it safe and is it cheap? Those are really the only two questions that matter. If you focus on just those two questions for the rest of your investing career, you will end up faring much better than trying to guess what is going to happen on a day-to-day basis in the stock market.

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I sat down this morning and, after reading the paper and watching the headlines, I ran a screen of global stocks looking for some safe and cheap ones that might be worth additional research. As a starting point for identifying safe and cheap, I searched for stocks that trade at a discount to tangible book value, an Altman Z-score of more than 3 to indicate that the balance sheet is safe and the bills could be paid, as well as a Piotroski F-score of 6 or higher to indicate the financials and fundamentals were improving.

Initially, I had a list of 155 such stocks that traded here in the U.S. A little further investigation showed that most of these were OTC foreign issues that traded by appointment only, so I added liquidity to the list. It's critical you can  actually buy the shares. Having said that, I think most investors overvalue liquidity. It might be worth your time to review some of these illiquid stocks and see if you can't make an appointment with some of the better ones.

Once I added a liquidity requirement, the list shrank to just 20 names. When I threw out the Chinese and Russian stocks (I don't let my money go to hostile nations without me) the list was just 12 stocks out of the 11,000 or so stocks in the database. One of the most amazing discoveries of my career has been that an intense focus on safe and cheap is the best market timing tool ever developed. When there are lots of safe and cheap stocks it is time to buy like a madman and become as fully invested as possible. When there are few it is a time to cut back your exposure dramatically.

There are some pretty interesting companies in the list right now. Kyocera (KYO - Get Report) is a Japanese company with fingers in a bunch of different pies. The company makes ceramic components and parts for electronic devices, telecommunications and information equipment and solar energy equipment and optical instruments. All in all, it has 197 separate subsidiaries. The stock is trading at 85% of book value right with a Z-score of 3.16 and an F-score of best in class 9. The stock is both safe and cheap using my initial definition and worth a further look by long-term investors.

It is hard to find a company in a more basic business that Seneca Foods (SENEA - Get Report). The company produces and distributes processed fruits and vegetables. It sells canned and frozen fruits and vegetables under a variety of brands and also pack produce for the Green Giant brand. The stock is certainly cheap, with the shares trading at 88% of book value right now. The company has a Z-score of 3.26 and an F-score of 6, so it is safe and conditions are improving. The stock is worth a deeper look by long-term, value-oriented investors.

The remaining stocks on the list are American Capital (ACAS - Get Report), Fuji Films (FUJIY), Renewable Energy (REGI - Get Report), TravelCenter (TA - Get Report), hhgregg (HGG - Get Report), Fuel Systems (FSYS - Get Report), Richardson Electronics (RELL - Get Report), Pericom Semiconductor (PSEM), Lake Entertainment (LACO) and L.S. Starrett (SCX - Get Report). Keep in mind that this is a research list, not a buy list.

Editor's Note: This article was originally published at 3 p.m. EDT on Real Money on March 21.

At the time of publication, the author was long RELL, LACO, PSEM and TA..

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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