A “Smooth” Screen for Cheap Stocks

The concept of “smoothing” earnings is nothing new to value investors. Finding a company that has been thrown in the bargain bin after one or two bad years, with no regard for true (long-term) “earnings power,” has been the bread and butter of many great track records.

Yet, I’m surprised how often the “CAPE” ratio (cyclically adjusted price to earnings ratio), as it has come to be known, is applied to general market indexes while its application to individual stocks is largely ignored. This is somewhat ironic since, long before Professor Robert Shiller made the metric famous, Graham and Dodd were looking at the “average earnings” of individual stocks in their classic tome Security Analysis.

Now, admittedly, using a 10-year average P/E on raw data comes with a whole host of problems/issues, not the least of which are:

• A company with rapidly growing earnings may have an unfairly high CAPE (i.e. its earnings from 5-10 years ago may be incredibly small, and not representative of its current earnings power).
• A company with rapidly declining earnings may have an unfairly low CAPE (i.e. its earnings from 5-10 years ago may be too high and not representative of its current earnings power).

Yet, I would argue that most fundamental investors would want this type of “messy” data - an idea screen where there a lot of false positives, and where analytical ability can be used to pick diamonds in the rough (or is it nickels in front of bulldozers?). 

So, with that background, I decided to run a screen to find the stocks with the lowest current CAPE ratios. My criteria:

• All data is from Bloomberg as of March 12, 2015
• CAPE is defined as: Current Price / 10 Year Average Diluted EPS
• Note: Diluted EPS does not adjust out discontinued operations. This (good or bad) adds to the “messiness” of the data.
• Minimum market cap: $15 million
• Stocks traded on a U.S. exchange and domiciled in the U.S.

As usual, I have not scrubbed the data. There may be incredible inaccuracies. Please do your own research and due diligence.

Without further delay, what follows is a listing of the 100 cheapest U.S. stocks based on a 10 year CAPE.  Happy hunting!

Cheapest 10 Year CAPE Securities as of March 12, 2015
RANK	COMPANY	TICKER	CAPE	MARKET CAP
1	RADIOSHACK CORP	RSHCQ	0.30	$18,629,942
2	YASHENG GROUP	HERB	0.85	$74,446,728
3	FIRST MARBLEHEAD	FMD	0.85	$72,064,624
4	ITT EDUCATIONAL	ESI	1.49	$175,393,152
5	LIGHTING SCIENCE	LSCG	1.53	$65,083,476
6	OTELCO INC-A	OTEL	1.64	$15,022,044
7	SPECTRUM GROUP	SPGZ	1.90	$16,890,048
8	MILLER ENERGY RE	MILL	1.99	$59,692,124
9	MMA CAPITAL MANA	MMAC	2.01	$67,262,992
10	DOVER DOWNS GAMI	DDE	2.91	$37,511,552
11	HANDY & HARMAN L	HNH	2.94	$466,910,592
12	ALASKA COMM SYS	ALSK	3.26	$86,199,224
13	WEIGHT WATCHERS	WTW	3.58	$554,638,784
14	CREXENDO INC	CXDO	3.69	$26,036,280
15	MCDERMOTT INTL	MDR	3.74	$755,999,040
16	ENZON PHARMACEUT	ENZN	4.04	$45,949,388
17	APPROACH RESOURC	AREX	4.08	$270,270,208
18	CIM COMMERCIAL T	CMCT	4.20	$1,727,194,240
19	QC HOLDINGS INC	QCCO	4.54	$34,603,476
20	DIAMOND OFFSHORE	DO	4.76	$3,749,623,552
21	AEROPOSTALE INC	ARO	4.78	$292,753,408
22	AMBASSADORS GRP	EPAX	4.81	$42,097,752
23	BOOKS-A-MILLION	BAMM	5.08	$38,678,260
24	GULFMARK OFFSHOR	GLF	5.56	$369,037,760
25	NATURAL RESOURCE	NRP	5.63	$913,579,712
26	HARVEST NATURAL	HNR	5.84	$22,372,442
27	TIDEWATER INC	TDW	5.93	$1,136,976,640
28	WEBCO INDS INC	WEBC	6.09	$57,836,000
29	EMERSON RADIO	MSN	6.13	$35,268,780
30	FULL HOUSE RESRT	FLL	6.13	$28,126,254
31	COMDISCO HOLDING	CDCO	6.19	$25,986,734
32	DAWSON GEOPHYSIC	DWSN	6.20	$103,464,000
33	BP PRUD BAY-RTU	BPT	6.24	$1,260,460,032
34	MARATHON OIL	MRO	6.28	$17,352,826,880
35	MITCHAM INDS	MIND	6.28	$65,133,060
36	NEW ULM TELECOM	NULM	6.42	$40,300,540
37	FIRST INTER/MT-A	FIBK	6.51	$1,235,635,328
38	INTL SHIPHOLDING	ISH	6.53	$95,034,152
39	CNB CORP	CNBW	6.62	$83,050,352
40	PEABODY ENERGY	BTU	6.64	$1,584,323,456
41	INTERNET PATENTS	PTNT	6.73	$17,683,220
42	CRESTWOOD EQUITY	CEQP	6.88	$1,154,074,624
43	CONTANGO OIL & G	MCF	7.03	$429,474,080
44	FRIEDMAN INDTRY	FRD	7.10	$43,651,752
45	ROWAN COMPANIE-A	RDC	7.11	$2,378,658,816
46	PROSPECT CAPITAL	PSEC	7.13	$3,064,334,080
47	ADDVANTAGE TECH	AEY	7.17	$23,486,380
48	US ENERGY CORP	USEG	7.17	$34,633,812
49	INCOME OPP RLTY	IOT	7.38	$29,594,320
50	SAN JUAN BASIN	SJT	7.48	$604,516,096
51	INSIGNIA SYSTEMS	ISIG	7.49	$35,639,948
52	KOSS CORP	KOSS	7.64	$17,054,050
53	CASH AMER INTL	CSH	7.68	$700,230,464
54	MVC CAPITAL INC	MVC	7.71	$221,352,512
55	DENBURY RESOURCE	DNR	7.77	$2,746,093,312
56	AMBASE CORP	ABCP	7.80	$87,586,168
57	NORTHEAST BANCRP	NBN	7.92	$82,408,760
58	ALLIANCE SEMICON	ALSC	8.05	$26,603,548
59	ITT CORP	ITT	8.07	$3,643,640,064
60	UNIT CORP	UNT	8.11	$1,320,100,864
61	ANNALY CAPITAL M	NLY	8.16	$9,837,822,976
62	GUESS? INC	GES	8.30	$1,506,866,688
63	NL INDUSTRIES	NL	8.37	$347,595,776
64	INTERSECTIONS IN	INTX	8.39	$66,432,296
65	YUMA ENERGY INC	YUMA	8.40	$95,723,688
66	SERVOTRONICS INC	SVT	8.42	$15,312,430
67	COMSTOCK RES INC	CRK	8.43	$218,129,632
68	ATWOOD OCEANICS	ATW	8.50	$1,846,573,696
69	EMPIRE RESOURCES	ERS	8.62	$40,482,800
70	SCHNITZER STEEL	SCHN	8.84	$441,139,712
71	HORNBECK OFFSHOR	HOS	8.88	$693,716,864
72	EZCORP INC-A	EZPW	8.91	$578,700,544
73	ABERCROMBIE & FI	ANF	8.91	$1,462,987,520
74	JPS INDUSTRIES	JPST	8.96	$99,746,984
75	GEOSPACE TECHNOL	GEOS	9.09	$222,042,960
76	BRINK'S CO/THE	BCO	9.10	$1,302,278,272
77	APOLLO EDUCATION	APOL	9.11	$2,914,203,648
78	ACRE REALTY INVE	AIII	9.16	$27,079,310
79	US GLOBAL INV-A	GROW	9.19	$46,531,976
80	AVON PRODUCTS	AVP	9.39	$3,628,035,584
81	JOY GLOBAL INC	JOY	9.39	$3,851,165,952
82	MURPHY OIL CORP	MUR	9.46	$8,305,296,896
83	PATTERSON-UTI	PTEN	9.47	$2,538,122,240
84	EDUCATIONAL DEV	EDUC	9.59	$16,854,016
85	PARKER DRILLING	PKD	9.62	$362,480,576
86	OIL STATES INTL	OIS	9.65	$2,127,773,312
87	MESABI TRUST	MSB	9.73	$225,654,992
88	CAPSTEAD MORTGAG	CMO	9.76	$1,118,605,696
89	REPUBLIC BNCRP-A	RBCAA	9.84	$495,420,800
90	NATL PRESTO INDS	NPK	9.88	$401,178,720
91	VISKASE COS I	VKSC	9.89	$207,551,872
92	GRAFTECH INTL	GTI	9.97	$532,219,360
93	DYNEX CAPITAL	DX	10.21	$448,844,896
94	ARES CAPITAL COR	ARCC	10.23	$5,264,451,072
95	WINDSTREAM HOLDI	WIN	10.23	$4,676,486,656
96	GENCOR INDS INC	GENC	10.23	$92,623,472
97	RESOURCE CAPITAL	RSO	10.27	$612,742,720
98	AMPCO-PITTSBURGH	AP	10.33	$178,801,184
99	VALUE LINE INC	VALU	10.39	$153,571,392
100	OCWEN FINL CORP	OCN	10.52	$1,181,401,088

Disclosure:  Author may hold a position in securities listed in the table.


Harvest Investor © 2015. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

Bakken Resources: A Net-Net That Doesn’t Net Out

I was excited to recently stumble across a company selling for less than net current asset value that’s based in my home state of Montana (because geographical proximity is a good reason to invest in a company, right?). Since there are only about a dozen publicly traded companies in all of “Big Sky” country, it was intriguing that one might be trading so cheaply as to be priced at less than liquidation value. With a name like “Bakken Resources Inc.”, however, I had a feeling I knew why it might be so cheap.

Bakken Resources (BKKN) is a $5 million market cap pink sheet company which describes itself as a “non-operating participant in the Bakken play in western North Dakota. The Company plans to focus on evolving into a growth-orientated independent energy company engaged in the acquisition, exploration, exploitation, and development of oil and natural gas properties.”

While the name “Bakken Resources” brings to mind a clear picture of where the company has acreage, BKKN has recently been selling some of its North Dakota assets and entering into leases in Idaho.

It was the sale of mineral rights in North Dakota, and the corresponding cash inflow, that put the company firmly in the net-net category. As of September 30, 2014 (the most recent financials), BKKN had:

Cash	$7,396,974
Accounts Receivable	1,037,186
Other Receivable	198,509
Prepaids	37,897
Total Current Assets*	8,670,548
Total Liabilities	2,187,417
Net Current Assets (NCAV)	6,483,131
Shares Outstanding	56,735,350
NCAV/Share	$0.1143
Current Share Price	$0.089
Discount:	22%

*Note: Current Assets do not sum correctly; an $18 discrepancy is not explained in the 9/30/14 10Q.

This kind of valuation might spur me to dig a little deeper on their leases, acreage, mineral rights, and royalties had it not been for three quick concerns that made this a firm PASS.

1. $6,000,000 of the cash on hand is “reserved for a future acquisition of oil and gas properties.” There goes our net-net status. Now maybe the company is still cheap if we believe management can go out and find some phenomenal acreage with these funds (especially since they should be buying on the cheap with the recent drop in oil prices), but now you’re investing in management, not the company. And to that thought . . .
2. There seems to be a spider web of related party transactions, payments to management, and general overlap in the business. These relationships are so convoluted that the company itself has become confused - having to disclose a restatement with the September 30th 10Q where revenue paid to BKKN should have gone to Holms Energy Development, a related party controlled by the CEO of BKKN. While these types of relationships may be common in the oil and gas industry (see: McClendon, Aubrey), its not my game.
3. For a company with a $5 million market cap, BKKN is battling a whole host of lawsuits. While a number of these cases seem to be in the process of being settled (and to be fair, most seem to have gone BKKN’s way), a number are still on appeal and there is a shareholder class action suit still pending that alleges managerial breach of duty and other malfeasances. 

Bottomline, BKKN may be cheap, but there are enough question marks surrounding management and the operating structure of the company that I’ll devote my time and energy elsewhere.

Disclosure: No Position

Harvest Investor © 2015. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advices, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

The Best of the Best: Top Performing Stock of the Past 30 Years

Lately I have been contemplating what makes a company great. What are the building blocks that set a stock up for truly phenomenal long-term performance? Can we, as investors, find a trail of crumbs that lead us to the proverbial “great” company? A simple construct, but a lot of work for my feeble brain.

A lot of people much smarter than myself have tackled this topic, spent lifetimes researching it, and written volumes on the subject. I am not going to break any new ground. Rather, I simply want to share my starting point - a list of the top performing stocks over the last 30, 25, and 20 years (criteria: end date of 12/31/2013, traded on a U.S. exchange, ending market cap greater than $2 billion).

By going through some old Value Line manuals, I've been able to step back in “real” time and see what was happening and how the company was performing before it began its phenomenal run. It has been an enlightening experience (hint:  as Buffett/Greenblatt/(insert other great value investor) has said, ROIC really is important).

Hopefully you too can get some use out of the list. If you have thoughts or ideas on what made these companies great, or want to discuss them in more detail, please feel free to email (email on the right).

Rank	30 Yrs.	Ann. Return	25 Yrs.	Ann. Return	20 Yrs.	Ann. Return
1	Amgen Inc.	25.20%	Brown & Brown	27.10%	Monster Bev	35.40%
2	Danaher Corp.	23.70%	Drew Industries	25.30%	USANA Health	33.80%
3	Kansas City Sthrn	22.70%	Kansas City Sthrn	24.50%	Biogen Idec Inc.	33.80%
4	HollyFrontier Co.	21.70%	UnitedHealth Grp	24.00%	Keurig Gr Mtn	33.60%
5	Paychex Inc.	21.20%	Jack Henry	23.40%	Celgene Corp.	33.00%
6	The Gap Inc.	21.10%	Polaris Industries	22.10%	Gilead Sciences	31.20%
7	Nike Inc.	20.60%	Micros Systems	21.70%	Middleby Corp.	30.20%
8	Altria Group	20.30%	Balchem Crop.	20.50%	Astronics Corp.	28.90%
9	Precision Castparts	20.30%	EMC Corp.	20.20%	Cooper Comp.	28.20%
10	Stryker Corp.	20.20%	Charles Schwab	20.00%	Balchem Corp.	27.30%

Data:  Bloomberg

Harvest Investor © 2014. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.