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January, 2008


A happy benefit when markets are in negative territory is that such a situation creates many stock bargains. In fact, value investors often have mixed feelings about corrections and bear markets. If not burdened by significant margin debt, they can typically ride out downturns. While I would love to see our nest egg surging, it is nice to remember as the opposite happens that we do not have to sell till it seems a more favorable time for us. But once equities are off around 10% or so from their highs, excellent asset buy candidates begin to appear.

The value investing pioneer, Benjamin Graham, averaged an annual performance on his stock picks of over 17% through a more than 50 year period that began before the Great Depression. Had his dividends been included, the total return would likely have been close to 20% a year. During his later years in business, he and his firm set out a few simple rules for ordinary investors who had the time, talent, and inclination to do their own analyses. For instance: buy only stocks with both good value and a margin of safety. And Graham did more than anyone before to quantify definitions of good equity value and safety margins.

To be more precise, stocks meeting the following criteria would have met his basic, minimum standards for bargain assets in today's market:

1. Stocks with a price to earnings ratio of 9.3 or below and debt to equity of .99 or below;

2. Stocks with price to book value .8 or below and debt to equity .99 or below.

3. Stocks with dividends of 3.6% or above and debt to equity .99 or below.

The values in rules #1 and #3 above vary depending on the current estimate of Aaa corporate bond yield (currently about 5.4%), with which stock values are compared. Rule #2 is applicable at any time. There are many other guidelines in Ben Graham's value lexicon, but in my opinion these are the simplest and most readily applied by non-professional investors.

If one uses a good stock screener, she or he can finds dozens of stocks that now meet these requirements. So that large number can be sifted through for more refined quality, just as someone else might search for diamonds or pan for gold. Ideally, one chooses just the best among them for purchase, then holds them till they have realized their expectations in market value.

A few such assets will be bought out by other companies or private concerns, usually at a profit to the investor. Over the long haul, some of the others may prove to have been bad investments. Their companies may go bankrupt or at least never come back from their lows. But on average enough will turn out to be profitable gems to make this approach rewarding. Even if one does not do as well as Ben Graham, chances are the record will be better than that of the major averages and with lower risk of permanent capital loss.

Here are twelve nuggets that meet one or more of the above criteria today (effective 1/14/08):

Advanced Energy Industries, Inc.AEIS$11.357.341.230.00%0.00
Brooks Automation, Inc.BRKS$11.115.430.900.00%0.00
Heelys, Inc.HLYS$6.464.491.370.00%0.00
Intevac, Inc.IVAC$
NutriSystem, Inc.NTRI$25.187.955.360.00%0.00
NBTY, Inc.NTY$24.378.131.550.00%0.20
Rudolph Technologies, Inc.RTEC$10.4114.660.700.00%0.00
Tidewater, Inc.TDW$54.398.581.531.10%0.19
Vishay Intertechnology, Inc.VSH$9.9612.480.560.00%0.19
One Beacon Insurance GroupOB$23.739.221.233.60%0.35
Kelly Services, Inc.KELYA$16.999.350.753.20%0.10
QC Holdings, Inc.QCCO$10.6214.241.913.70%0.15

In general, I would hold each in a portfolio of several till the shares are bought out for cash and otherwise for 2 years. (Most, if they were going to do so, would likely have realized their market value potential within that period.)

If one prefers mutual fund investing, as is appropriate for most folks leading busy lives, a good way to deal with a falling stock market is to dollar-cost-average, making regular new investments in the most trusted funds, for instance adding $400 a month to one of them through an employer's tax-deferred 401k Plan, thereby automatically buying more shares when prices are down and fewer when they are up, reducing the overall price per share.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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