5 Bargain-Basement Stocks for Your Watchlist

As I've outlined in the past, I like to supplement the stable (if boring) core of my portfolio with beaten-down stocks. The strategy is a variant on Ben Graham's approach of looking for "cigar butt" stocks that had one puff left in them.

Essentially what I'm looking for are stocks that are trading at fraction of their tangible book value with the expectation that there is relatively limited additional downside and the potential for the stock to double on the upside. In addition to looking at the tangible book value multiple, I also like to examine the company's financial history -- to see whether its current troubles are recent or it's never been consistently profitable -- and try and gauge the upper end of the losses it could absorb. After all, a low tangible book value multiple doesn't do much for you if losses are destined to wipe out the company's entire equity value.

Another key to the strategy is investing in these stocks as a group. With struggling companies, singling out which individual ones will pull through can be somewhat challenging, but I've found it relatively easy to do well when I spread my bets. But that also means that I'm constantly looking to build my watchlist so that I have plenty of options to choose from.

Here are five low-priced stocks that are being added to my watchlist:

Company

Market Cap

Price-to-Tangible 
Book Value

Trailing 12 Months Cash Flow 
From Operations

CNO Financial (NYSE: CNO  )

$1.6 billion

0.35

$794 million

USEC (NYSE: USU  )

$643 million

0.5

$154 million

Genco Shipping (NYSE: GNK  )

$436 million

0.43

$243 million

StealthGas (Nasdaq: GASS  )

$148 million

0.48

$37 million

Penson Worldwide (Nasdaq: PNSN  )

$137 million

0.45

($104 million)

Source: Capital IQ, a Standard & Poor's company.

I've done preliminary research on each of these to make sure they fit the qualifications I noted above. However, before I add any of them to my real portfolio, I'll take a closer look at their Securities and Exchange Commission filings to get a better understanding of the underlying business and exactly why the market has decided to put such a low valuation on the shares.

In the meantime, they'll be on my watchlist. And if any of them look interesting to you, you can easily add them to your watchlist as well:

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On January 27, 2011, at 11:32 PM, Charlie1368 wrote:

    I also found Genco Shipping very cheap, but there is a problem with valuations right now in the shipping industry. The number of ships is tied to demand, which is highly cyclical. The net affect of this is that many of the shipper's assets may be overvalued under current conditions.

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