As of Friday's close, the S&P 500 was up a whopping 11.7% since the end of last year. I'm sure many investors are really happy about that.
But I'm not.
If that sounds crazy, allow me to point to what Warren Buffett wrote in his annual letter to Berkshire Hathaway shareholders:
If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day's supply.
In other words, what Buffett is saying is that as long as you're doing more buying than selling, you're better off if prices stay low and there are more bargains available.
And that brings us back to the nearly 12% surge in the S&P 500 so far this year. Some readers may know that I'm a fan of digging down to the bottom of the bargain bin to look for the best (and often, the dirtiest) deals out there. So when I watch the market surging, what I can't help noticing is that the bargains I love so much are rapidly disappearing.
That said, there are still a fair number of stocks that are at or near my definition of a "bargain bin" stock. Let's look at a few of them.
Bank of America
Source: S&P Capital IQ.
Tankers by Teekay
Teekay Tankers is a great example of the kind of companies found in the bargain bin. At first glance, you can't help noticing that this appears to be a very cheap stock. Closer examination, however, reveals some significant warts. For instance, Teekay gives shareholders all of its "cash available for distribution" every quarter -- and this is reflected in the stock's nearly 10% dividend yield. But at the same time, the company makes it a practice of continually issuing new shares to raise money. Those two together -- a big dividend and hefty share sales -- make for a combination I never like to see, because it's like having somebody put money in one of your pockets only to take it back out of another. In addition, Teekay has a dual-share class structure that gives some shareholders voting rights out of line with their economic interests -- also something I typically shun.
For those reasons, I have little interest in being a long-term Teekay shareholder. But I do like Teekay's business -- owning and chartering oil tankers -- and there's reason to believe that its industry is about to see brighter days. And lest we forget, the stock currently carries a bargain valuation. I've put my money where my mouth is on Teekay, as it's part of my personal portfolio. I'm also putting my public scorecard on the line by making a positive CAPScall on Teekay in my Motley Fool CAPS portfolio.
A pair of banks
But enough about Teekay. What about Puerto Rico-based banking group Popular? This is an apparent bargain that I'd rather take a pass on. While the book value multiple fits the bill, the numbers make me want to keep my distance. Popular has been profitable for the past four quarters, and that's a big plus, but its nonperforming loans are still troublingly high, and its reserves against future losses look low to me.
On the other hand, Bank of America still has significant challenges ahead, but it may be a bargain stock worth taking a flier on. Why? Near the top of the list is that the stock's current valuation leaves the possibility for a lot to go wrong and still be attractive. In addition, the bank's numbers -- nonperforming loans, capital base, etc. -- look a lot better than the bargain valuation suggests. Also in its favor is a recent vote of confidence from the Federal Reserve. And, of course, even though our legislators have voiced concerns about "too big to fail," for better or worse, B of A still very much falls into that category. Like Teekay, I've given B of A thumbs-up in my CAPS portfolio and own it in my personal portfolio.
Ready for prime time?
In a very different kind of business, First Solar is proving why it can be tough to invest in an emerging technology. Though I love the promise that solar energy offers, I've long held that trying to pick the eventual winners in the industry will be extraordinarily difficult. Not all that long ago, First Solar appeared to be a solid leader in the industry, but it's increasingly looking like a bit of a flunky. Cash flow from operations fell into the red for 2011, and operating income was basically halved. On the plus side, the company still has no net debt and is, as my fellow Fool Travis Hoium put it, "trying to make some moves that will help it stay competitive." I'm torn on this one -- I'm keeping it on my radar, but I haven't seen enough to convince me to pull the trigger.
Gambling on a bargain
I'll finish off with casino operator Boyd Gaming, and the reason not to buy here is easy: Boyd's ugly balance sheet. This is a debt-heavy company that could face big trouble if it hits a rut. On the other hand, Boyd owns a collection of worthwhile gaming properties that includes the Fremont Hotel in downtown Las Vegas and Borgata in Atlantic City. This stock certainly isn't for the faint of heart, but it joins Teekay and B of A among my positive CAPScalls and ownership positions.
Of course it's quite possible that none of these is an appealing investment for you. I believe that Teekay, B of A, and Boyd have the potential to deliver good results, but they're still long on bargain and shorter on investment meat. If you're looking for more of the latter, you can find plenty of it in The Motley Fool's special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can grab a free copy of that report.
The Motley Fool owns shares of Berkshire Hathaway and Bank of America. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, Boyd Gaming, Teekay Tankers, and Bank of America, but he has no financial interest in any of the other 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 Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.
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