Anthony Speciale Stock Market Analyst

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Why True Asset-Based Value Investing is Back for Big Gains

I cut my teeth as an investor back in the late 1980s and early 1990s, and we were really focused then on asset-based value investing. In other words, we were trying to buy things for less than they were worth based on their asset value, and this was a great time to be doing that. It was value investing as originally conceived by Benjamin Graham and Warren Buffett.

At that time, the junk bond empire of Michael Milken and Drexel Burnham was coming to an end, and there were a lot of banks and savings and loans that got in trouble. But there were a lot that didn’t, and the baby was being thrown out with the bathwater, so to speak.

That allowed us to buy quality banks at 50% and 60% of book value, junk bond closed-end funds at massive discounts north of 20% and yields approaching 20%. It was a great time to be making investments based on asset value.

Now, of course, the investment success of people using this strategy eventually brought more institutional capital into that field, so a lot of the opportunities have drifted away over the years. They come back during major market collapses, but they’re not really used as much on Wall Street these days.

If you ask your broker about this type of stuff, they’ll tell you that it’s dead, it just doesn’t work anymore and there are no stocks that meet those criteria. But that’s not true… There are plenty of stocks like that. You just have to work a lot harder to find them, and they’re not usually companies big enough for a big fund to pump a whole lot of cash into.

The key is to focus on quality with this strategy. Opportunities do arise, and I have two of them for you today with extraordinary potential, but a lot of these companies that trade for less than their asset values have something going on with them.

It could be a terrible business in some cases, or it could be an overleveraged company that has no hope of repaying its debt. Or you could just have a bunch of assets that are priced incorrectly and are worth nowhere near what the company is carrying them on the books for.

So, you need to be a bit of a detective and look through the data to see why a stock is priced so cheaply, how value could be unlocked and whether the company can survive while it tries to turn itself around. Luckily, I’ve done that work for you, and I have two stocks today that meet those criteria. They are great companies and extraordinary investment opportunities at current prices.

Kelly Services, Inc.

Kelly Services, Inc. (KELYA) is a global staffing company that also does career placement. This is a split share company, with A and B shares, with the B shares having greater voter control. That’s usually discounted in the stock price.

But there’s also the fact that the job market has not responded from COVID-19 that way we had hoped. Job growth has been slower, there’s still a bunch of people who are unemployed as well as a bunch of job openings. As that situation continues to improve, KELYA should continue to get more support.
They work in a lot of different industries, including medicine and technology, and they just bought Softworld, Inc., the world’s largest IT placement company. So, as the economy improves, business is going to continue to get better for KELYA.

It’s currently trading at 65% of tangible book value. I expect to see earnings growth rates in the high teens for the next four or five years, at a minimum. That should help lift the stock back up and into the institutional spotlight, where cash can come flooding back into the company and get the stock price a lot higher than it currently is.

This is a well-run company with solid fundamentals, growing earnings, increasing cashflow, and they’re funding all of their growth and some acquisition through the free cash flow they’re internally generating, so they don’t need to go to the market to sell stock or raise capital to grow the company.

So, at 65% of book value, a patient, aggressive investor can make a lot of money with shares of KELYA.

United Insurance Holdings Corp.

Next up is United Insurance Holdings Corp. (UIHC), which sells homeowners’ insurance in the higher-risk coastal states, like the Carolinas, Florida, Georgia, Louisiana, Texas and even New York. And these guys are really good at what they do.

They make an underwriting profit more years than they don’t, despite being in the very high-risk states. They hold a lot of the risk and reinsure a lot of the risk out. So, what you end up with is that in a good year, you make a lot of money, and in a bad year, you lose a little bit of money.

It’s a fantastic business model, and most people don’t take the time to dig in and figure out what’s going on with UIHC. It’s not a smooth, steady growth company, but it is growth over the longer term. It’s a very well-run business, and profits should be growing by about 20% a year for the next four to five years. And I’m looking for a massive earnings jump in 2022 as conditions continue to improve in the insurance industry.

The stock is currently trading at 71% of book value, and it’s got to go up 50% to just trade at its asset value. There’s also a dividend yield of about 6% on the stock because the company likes to share its cash flow with its investors. And guess what? Hurricane season is over, and while there’s a chance for November storms, the company has clear sailing for the next six months.

There’s also been a lot of positive insider activity in this fantastic, well-run insurance company. It’s a business that not too many people really understand, with a long growth runway ahead, at a heavily discounted price of just 71% of the company’s tangible book value.

So, both of these stocks offer the opportunity for outstanding long-term returns for what I like to call patient, aggressive investors.