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Tuesday, July 09, 2013

Cheapest Stocks

Today begins that annual adventure that my wife calls vacation. As near as I have been able to determined vacation is a process that involves me packing up my computer and research material and moving it to another location in a town with a beach. There is also a clause in our vacation policy that includes additional family and friends hanging around to irritate and interrupt me during the day. This year is New Smyrna Beach and at least I will have an ocean view while I am working.  Before I head off on this joyous occasion I spent some time today searching for the every cheapest stocks in today’s market.

Over the years I have found that is very important to own the very cheapest stocks that do not appear to be headed for liquidation or failure even if I am not that fond of the business. These very cheapest of stocks often end up providing a significant percentage of returns on an annual basis even when they don’t have a great theme or story to attract buyers. The act like bunny rabbit most of the time just hanging around at low prices until some event or news sends them hopping higher very quickly.

Penn Virginia (PVA) is a classic example of such a stock right now. I am really not a big fan of management at this company. They have missed several opportunities to maximize shareholder value, levered up the balance sheet and sold stock well under book value. The positive is that they won some own some assets with huge upside potential in the Eagle Ford basin and the stock is ridiculously cheap at less than 40% of tangible book value. They have been about to increase oil production and that should be 70% of the output next year. Hopefully they sell some assets during the next 12 months and use the cash to reduce debt levels. I would not have a huge position in the stock but I do have a small one. If things work out over the next few years the stock could easily triple or more.

I have owned National Western Life Insurance (NWLI) several times over my career and I own a little bit right now. The company writes a lot of interest sensitive business such as universal life insurance and retirement annuities. As you would expect this is not the best of businesses with yields at current levels. The share structure gives the Chairman control of the company so shareholders do not have much a say and I suspect this is the only reason this company has not been taken over before now. The company has done a solid job of managing the business in difficult times and at 40% of book value the weak business environment is not that big a factor. The stock is safe and cheap enough to buy.

Swift Energy (SFY) is not making the translation to oil and natural gas liquids as quickly as the marketplace might have hoped and the stock has been punished. They are continuing to transition for a shallow water driller in Texas and Louisiana to an unconventional oil and gas driller and although it may take longer than some expected I think it will be successful in the long run. I f I am right the shares will trade from the current level of 50% of tangible book value to a substantial premium to book. The early results from Eagle Ford are positive and the company should be able to increase its oil and liquids production over the next few years.

To my discredit I never pulled the trigger on shares of Genworth Financial (GNW) and the stock has almost tripled over the past year. Incredibly it is still cheap as it recovers from deep financial distress. The mortgage insurance business almost put these guys out of business but conditions are improving. They have placed several lines of business including variable annuities and Medicare supplements into run off. The long term care business is seeing strong results as the population ages and even the mortgage insurance business is showing signs of a recovery. In spite of the strong stock price performance the shares still fetch just 40% of tangible book value. I am not going to chase the stock just yet but if we get a broad market pullback I will be a buyer of Genworth.

There are not a lot of cheap stocks around right now but history tells me that I need to own the ones I can find.

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