Assets Over Earnings
Wednesday February 18, 9:00 am ET
ByTim Melvin, RealMoney.com Contributor
I am forcing myself to look for signs of a recovery every day. One thing I've been focusing on is what worked in past bleak economic times. There were investors who did very well, for example, throughout the 1970s. The key seems to be focusing on assets.
Do not tell me about earnings right now -- I do not care and neither does the market. National Oilwell Varco had a great earnings report and the stock was hammered. Given the state of the economy, anyone who issues an earnings forecast and uses it to value stocks is living in a dream world. It will be impossible to predict economic activity and earnings for several quarters.
I want to buy assets on the cheap right now. Give me a pile of bricks, mortar, metal or, best of all, cash that I can buy at a discount-to-appraised value. Even if a building goes down another 25% from current levels, if I paid 70% of current value in the first place, I am probably OK. When a recovery does begin, there will be a scramble to buy cheap assets to fuel future growth and I want to be sitting here with a pile of them to sell.
My asset stocks are not going to cause me to lose much sleep. Since I avoid debt-laden companies, my only concern is that they use assets improperly or sell them at ridiculous prices. Even in a bad economy, stocks like Adaptec and Sycamore Networks that sell for cash balances are worth more than the current stock price.
Winn Dixie has cash, assets and a decent business. They are not the market leader in the grocery business, but they are holding their own. Hilltop Holdings not only trades for less than cash, but it's uniquely positioned to benefit from the current mess in the banking business. Gerald J. Ford controls the company and has made billions buying distressed banks.
Despite the withdrawals and ongoing death watches for activists and private equity investors, there are a few still standing and we will start seeing 13HF filings soon. Watching their purchases can help you find asset-rich stocks worth some attention.
Many of them are also focused on assets and will be a source of ideas. It was buying by Bruce Berkowitz that tipped me off to how cheap the eclectic portfolio of assets held by Leucadia had become. Keep in mind that 13F filings are a source of ideas only -- do your own homework on these stocks.
I do not think we are out of the woods yet. There are still more problems to come in the real estate market, while foreclosures continue to be a problem. Earnings will not improve in the second quarter. I am not suggesting that you pile into the stock market, but that it will get better someday. As assets come on sale, it makes sense to slowly and carefully build a portfolio of these companies.
The time has come to ignore price to earnings ratios and earnings forecast. Focus on price to tangible book and net cash on the balance sheet. Margin of safety is the key to successful investing in this market. There is simply no safety in unpredictable falling earnings.
