Follow the Professor

We have been tossing a lot of ideas around Chez Melvin the past few weeks.  Last week we discussed using hedged portfolios of S&P 500 stocks trading at new lows or had fallen to the fallen knife level by dropping 50% in the past year. I am tracking those ideas and have some friends who are more quant oriented than I assembling the models to back test these strategies. Tim Collins, Bob Byrne and I usually have at least three plots to over throw the world and dominate the markets under construction at any given moment in time. Last night I tested using unconventional yield stocks to create a carry trade with interesting initial results.  We throw these ideas around, pick them apart test them and throw the vast majority in the garbage can.

When it comes to markets and finance there are many beautiful ideas and theories that can be dredged from price movements and historical patterns. They are elegant and hold the promise of untold riches right up to the point where you actually test and track them. I have been doing this for a few decades now and I have seen just about every version of every system ever developed. I have dreamed up more than a few of my own. Some worked, most did not. I try to always practice what I learned from Victor Niederhoffer years ago and test everything.  Some added a slight edge to my investing but most were just intellectual exercises that added to my knowledge of what does not work.

One book that never strays far from my desk is Investment Fables by NYU Stern School Professor Aswath Damodaran. The book explores many of the investment theories and approaches that have been developed over the years and exposes the flaws of each. In one chapter he breaks down the concept of buying stocks below book value, my favorite approach to investing. He finds that results are vastly improved by focusing on companies that trade below book value, have manageable debt levels and returns on equity of at least 8%. I have set up a screen using these criteria and it has provided some very successful ideas over the years.

 When I run the screen this morning I see that some old friends are right near the top of the list. Superior Industries (SUP) and Corning (GLW) have both been on this list of stocks in the past. Both are trading right at tangible book and if they fall to the 80% level they will be too cheap not to own stocks. Corning should see an uptick in global LCD demand towards the end of the year and that should boost earnings and get the stock price heading higher. Superior is just an outstanding company that is suffering margin pressures as a result of contracts entered during the height of the recession. As those contracts run off and are replaced margins should recover to historic levels and boost the stock price. Should we get a little more fear in the market and the Volatility index get above 30 both are a good candidate for put selling to back into the stock at a lower price.

Trading at 90% of tangible book value Patterson UTI  Energy (PTEN) is also right on the cusp of being too cheap not to own. The third largest operator of land based rigs is seeing the same pressure from lower oil and gas prices as its competitors. After shuffling its rigs around the company now has 58% of the fleet with liquids rather than natural pressure exposure and that should help them withstand the industry downturn. With firmer energy prices I can see this stock easily doubling to the highs of the past two year.

As with many of my other screens the low price to book, high roe on equity screen shows a lot of stocks that are close to bargains but not quite too cheap not to own. Practice patience. I am pretty sure you will get your chance to buy them at the right price before much longer.

If you do have Professor Damodaran’s web site at http://pages.stern.nyu.edu/~adamodar/book marked, do it now. It is an invaluable resource.

Fathers Day Rambings and Ruminations

Ahh Fathers Day. That annual day to offset the fact that most of the year we are just the surly man in the background yelling for quiet and some crap about getting the chores done. All over America men are unwrapping ties they will never wear and the 209th coffee cup to add to their collection and eating a breakfast cooked by some decidedly unculinary offspring. Later we will probably get to fire up the grill and grill some stuff and thank the heavens we are not Moms and so at least the dreaded brunch is not in the equation.

 

I am lucky in this regard. My kids are in their twenties and my stepdaughter is heading off with her dad today so I get to be taken out to eat crabs drink beer and hopefully watch the Orioles smack the Braves around the diamond. My wife and my kids are my three best friends on the planet so it’s going to be a pleasant day and I have a quasi-legal excuse to skip most chores. The little one has already started the day off with a pretty cool gift and card.  Having a curmudgeonly ogre for a step dad is tough when you are a 9 year old princess but she makes the most of it.

 

One can’t help but think about the journey and adventure that is fatherhood on this day. I don’t give a shit if it is a Hallmark created day that exists to sell greeting cards, ugly ties and charcoal. It still makes me think to the past 28 years and all the steps,  missteps, adventures and disasters that have led to this particular Father’s Day. It has been an interesting experience and worthy of reflection.

 

I never set out to be a Father. It was never high on my list of life’s priorities.  Both my kids just sort of happened along the way. They frequently give thanks to Scotch for the miracle of their birth. I had no idea what I was doing and just sort of made it all up as I went along. I may not have set out to be Dad but I cannot imagine what my life would have been like if I wasn’t.

 

I can still, as I am sure most fathers can, recall the moments of my children’s respective births. To be clear I was not, and still am not, a huge fan of the whole father in the operating room bit. I was dragged from my mother’s heavily sedated body while my father sat in the waiting room chain smoking and nipping from a flask with other soon to be poppas and that’s a system that makes perfect sense to me. But I was there and the one single moment will stay with me forever.

 

Lisa came into the world screaming and making noise (this is no surprise to anyone that knows her. The child is just loud). She was born with a full head of hair and eyes that took up about half her face. She was making all kinds of bellicose noises right up until they scrubbed all the yuck off, wrapped her in a blanket and handed her to me. She stopped crying and those enormous eyes looked up at me with a look that said she knew me and was glad to be here. Of course she ruined the moment by taking a giant crap shortly thereafter and I had to change my first diaper before we could present her to the rest of the family in the waiting room.

 

Tommy ,on the other hand, didn’t cry at first. As the little Asian doctor lifted him up so the nurse could cut the cord he decided, like most guys after a long period of confinement that he needed to take a leak. He pissed all over the little doctor as a way of introducing himself to the world. That’s been pretty much his approach to life ever since.

 

I have been a divorced father pretty much most of their lives. Lisa was 6 and Tommy 2 when their mother and I split up. My perspective is perhaps not the same as one who lived in an Ozzie and Harriet family but is probably more the norm these days. I have learned a few lessons along the way and thought I would write them down while I was reflecting on fatherhood. They may or may not be of any value but it is too early to drink beer and the game does not start for several hours so this will help me pass the time. I don’t know how much of it is because of anything I did but my kids have turned out to be amazing. I hope I played at least a small part in that and that the lessons learned along the way have some value.

 

I always get a kick out of those who tell me that kids won’t change their life. Of course they will. You are not going to be taking the stroller to happy hour and kids are frowned up in casinos. You and Jr, are not going to hit the racetrack on Saturday or take in the symphony that night. Baseball games and war movies are going to be replaced by little damn purple dinosaurs, robots, princesses and other horrible little creations. Life is going to change more than you can possibly imagine. Don’t blame the kids however. It doesn’t matter if your offspring were procreated in a moment of candles and whispers or during wild monkey sex on the kitchen table after a drunken night at the dock bar. They are here now and your life is going to change. You made them and it’s your job to mold them.

 

It’s not always easy. We all have those nights where you come home after a shitty day. The market took a crap on your portfolio, you biggest client wants to know why they don’t own latest piece of shit.com and is talking about taking his account to Goldman Sucks. You firm made the front page of the WSJ and not in a good way. The SEC called and by the way the audit is tomorrow. You assistant discovered the joys of cocaine and disappeared with all copies of your presentation to the largest pension fund in the area. You just want to sit back drink some scotch, watch some mindless TV and forget the damn day.

 

Tough shit pal. The algebra has to get done and the whole concept of this damn solve for x thing is not penetrating your daughters brain. Your son has a report due on Tom Sawyer and wants to know if he can watch it on DVD instead of reading the book. They haven’t had dinner yet and unlike you they do not live on beer and leftovers from the diner. And by the way the pinewood derby race is this weekend and that block of wood on the table is probably not going to perform well with no wheels or decorations. You can relax some other time, say in 10 or 15 years.

 

There’s more to it that that I am afraid. If you are going to do this right they have to come first much of the time. That trip to the Keys is out of the question if it coincides with the little league tournament. That dream job in New York is going to be delayed if the ex has custody and lives in Peoria. That date with the hot chick you met at the bar will have to be cancelled if someone has a fever. You can still live your life but you will have to make choices and modification along the way. You made em, you raise them.

 

I have one key to raising kids that has served me well over the years. You have to love them. I don’t mean hugs and kisses and all that crap as nice as that is. You have to love them enough to tell them no early and often. No they cannot have jello and chips for breakfast. No they can’t say up to watch Charlie Sheens new show. No, they cannot leave the house dressed like that No, they cannot do their homework later. No they can’t go hang out at the mall with all the budding trailer trash and lounge lids from school. No they can’t take the car tonight.

 

You have to love them enough to be the bad guy. In my general experience Moms suck at being the bad guy. No matter what is going on with your ex or how much you wish she would run off to the far corners of hell with her biker tennis pro boyfriend she needs to be able to scare the shit our of your kids by threatening to call you. You need to love them enough to hop in the car and go over spank their little asses or ground them for eternity to whatever it takes to restore discipline. You and your ex can hate each other on your own time. When it comes to the kids you still have to fill the dad disciplinarian role.

 

You need to love them enough to let them fall and stumble. Mom can kiss their boo-boos. They are good at that. Unless there is vomiting or stitches involved dad needs to get them brushed off and back in the game.  Teach to take the bumps of bruises of life and get back up. Its dads job to teach time how to overcome setbacks, that broken hearts don’t last forever and that pretty much everything can be overcome if you want it bad enough.

 

Love them enough to be an asshole. You know, the asshole that turns off the TV and kicks them outside on a nice day. The kind of asshole that puts passwords on the computer and won’t let them have an iPhone until they can pay of it themselves. Be the kind of absolute asshole who makes them contribute to their first car and pay their own insurance. Be the unbearable bastard who grounds them for anything less than honor roll. Be that dad who won’t let them read the cliff notes or watch the movie, the one who just doesn’t give a shit what Susie and Johnny s parents let them do. Set your standards and be enough of an asshole to hold your kids to them.

 

As they get older it gets tougher because you have to hold your own instincts in check enough to let them trust you. Your kids will experiment with sex, drugs and booze. They will make some incredibly stupid mistakes and questionable decision. In other words there is a very good chance that your teenagers will do the same type of stuff you did. If your kids trust you and can talk to you without a self-righteous angry response perhaps you will be able to guide them through these difficult years. If you’re as lucky as I was your kids will do only a fraction of the truly stupid shit you did at their age.

 

It is not all being the hard ass tough guy. You have to take time to play with your kids. Wrestle with them, tickle them until they pee. Take them outside and teach them to throw a baseball. Teach them chess and checkers. Go to all the little league games and dance recitals you possibly can because as big a pain in the ass as they are now they will be big memories for all of you later in life.

 

Fatherhood is not easy. It takes effort, concentration and balls the size of your average wild alligator wrestler. Some of the stuff you thought you wanted is going to have to be set aside. I have had to make a lot of choices and decisions over the years that would have been no brainers if I didn’t have kids. I do not regret a single one of them. The success of my kids and their happiness in life so far is proof that I made the right decision. As a result I am far happier with my own life.

 

When I look at my life so far I am more than satisfied with my legacy to date. I didn’t cure cancer; I am not the biggest hedge fund a manger in the entire world. I didn’t build any libraries or endow any foundations. I did play a part in bringing the world an honest hard working business man with integrity and a school teacher who is devoted to teaching your kids to read, to learn and to grow as individuals. Erin and I are working on bringing you a Pulitzer prize winning author who is also the world’s most famous fashion designer in her off hours. I have done much in my life but if my only achievement was my children I would be proud to stand on my record. That’s the secret of being a dad.

Now, I am off to stick the little shits with my bar bill for a change. Happy Fathers Day to all.

Palm Trees and Stock markets


So the time has come at long last. The boxes are starting to pile up around the house and the packing is well under way. I never really meant to stay in Maryland this long but have been here now for a little over 20 years. I came home from the West Coast for a wedding and just stayed. I grew up here in Annapolis and have lived a big percentage of my life somewhere between Kent Island and Baltimore. I have many wonderful memories of the state but the time has come to leave.
I have talked about leaving for years now. I considered moving to my favorite city on the planet. I love Chicago and was pretty much ready to move there back in the early part of the new century. I love the city and am pretty sure I would have been able to easily raise more money and been exposed to more opportunities in the Windy City. I am one of those weirdoes who doesn’t even mind it there in the winter. The bars are heated and you can always take advantage of the window between snowstorms to get south for a few days. It’s a vibrant exciting city with everything New York has with wider streets and nicer people. However right about then the daughter developed her health problems and my son was not solidly on his feet yet.

Key West has always been a potential destination. As has Siesta Key. Naples has been a serious consideration as a new home. I love coastal living and Florida has long been an idea I have considered as a new home. Property prices and life style once made Lexington, Kentucky a very serious candidate. A town settled by Irish gamblers with a world class university as the focus of the town would not have been a bad place to live back in my single days. Despite all these considerations and ideas something always came up and I stayed put in Maryland.

Maybe I needed to stay here to meet Erin. God knows life anywhere with my partner and best friend is a lot better than being the curmudgeonly old man at the end of the lane who scares the shit out of the neighborhood kids. Had we never met I could easily see myself as a hermit with a little house at the end of the longest road in the smallest town on the west coast of Florida or along the redneck Rivera of the  panhandle or Alabama. Thankfully fate provided and I have been spared that existence.

Now at long last it is time to go. Erin has received a great job offer in Florida working with the same bank. We are heading to Orlando, not the coast but I am more than okay with that. It is only an hour or so to the beach and the 9 year old is over the moon about living in the same neighborhood as Mickey Mouse. I will have palm trees in my yard and am contemplating taking up bass fishing again as there are several big lakes right by the new house. An average temperature in February in the 70s just doesn’t suck.

I love Maryland but it simply no longer makes sense to live here. The recent tax increases passed by the legislature are a punishment for achieving any sort of success. They instituted a millionaire tax on those making more than 100k or 150k as a couple. The new blended rate including local add ons is now over 8%. They doubled tobacco taxes on certain products. Flush taxes and vehicle registration fees were doubled. The dealer processing charge for when buying a car wars tripled. The drink tax was raised by 50%. Road and bridge tolls were raised by 60% with more on the way. The cost of a birth certificate doubled.

Let’s consider some of our other legislative achievements the past few years. We spent gajillions to pass same sex marriage which immediately was moved to referendum and will likely be defeated on the November ballot. I support same sex marriage but this was all political posturing for Mr. O’Malley when he moves to the national stage. We voted to allow ILLEGAL immigrants to pay in state tuition. We redistricted that state creating voting districts where you cannot drive from one to the other of most of them without crossing a boundary. We basically outlawed pit bulls. The state shifted teacher pension burdens to the counties with no means to pay for them.

Maryland is consistently ranked as one the most anti-business states in the country. We have high income and corporate taxes. Our environmental laws and fees are onerous to the point of the ridiculous. Local zoning restrictions and regulations are draconian. The cost of unemployment insurance keeps rising. Business is over taxed and over regulated. In spite of this state officials ponder why there are no corporate headquarters in downtown Baltimore anymore. They are clueless. The Free State is now the over taxed nanny state.

I have loved living here. Kent Island in particular is one of the best places I have ever lived. It is like living in a resort town populated by incredible people. I loved my 15 years there and have stories, memories and friends there that will last the rest of my life. The Chesapeake Bay is a national treasure that has provided endless hours of fun. Ocean City is the tackiest place on earth and fun as hell if you approach it with the right attitude. I know every inch of every street, alley and barroom in Annapolis and I will always treasure the thoughts of my childhood and teenage years in that beautiful town. Navy football, Orioles baseball, and Ravens football are all things I shall recall fondly. I will still root for them all but from 800 or so miles south under the shade of a palm tree.

I love the state, the places and the people. The local government has become untenable for me. I just do not see the value of living in a state that thinks so little of me of an individual but is so overly fond of taking my money. It has been a long time coming but it is time to go. Palm trees, warm winters and Mickey Mouse await my arrival.

Before we move along I want to take minute to consider the markets. We have moved into what I like to call a “are you fucking kidding me” (AYFKM) market. Spain is being bailed out. AYFKM? Jobs fell to 69,000. AYKFM?  NetFlix (NFLX) is losing customers AYFKM? Gold is down 50. AYFKM? Gold is up 20 AYFKM? Mortgage applications are up. Home prices are down. Europe is dead. Europe is rescued.  All AYFKM moments.

We are in a market where a lot can go wrong but the central banks of the world are determined to not let that happen. Some companies are showing sterling earnings and there is a significant chance that Amazon (AMZN), LuluLemon (LULU) and Ulta Salon (ULTA) could end up owning the universe. At least we will be a well groomed, trimly attired and well-read population should this actually happen. There is a lot that could go wrong and some things that could go right. We are in no man’s land where prices do not justify widespread buying and with zero interest rates and a market that is not grossly overpriced. If anyone tells you with a high degree of certainty what the economy and the market will do over the next year I suggest you kick them the general area of the genitals and  stand over their fallen form, yell AYFKM and walk away.

The proper course of action is to do nothing. Last fall when the world was widely perceived to be ending I added to my cheap stocks. I have my hotel REITs like Sunstone Investors (SHO),Felcor Lodging (FCH)and Ashford Hospitality  Trust (AHT). We bought shopping centers like Kite Realty (KRG) and Cedar Realty (CDR). I have been selectively adding little banks like Eagle Bank of Montana (EBMT and Heritage (HBOS). I have not sold any of my foreign banks like Royal Bank of Scotland (RBOS) or Bank of Ireland (IRE). I bought  a small energy postion earlier this year  with names like EXCO (XCO),  Penn Virginia and most recently Hess (HES).I still have stocks like Disney (DIS), Fly Leasing (FLY), Rowan (RDC) and Seagate (STX) I bought in the 08 and 09 meltdowns.  I am holding them all but not rushing to add or buy new names
We came into the year with a diversified portfolio of safe and cheap stocks along with a high percentage of cash. Nothing is up enough to sell but the market is not creating a plethora of new inventory right now either. I am not up as much as I once was but I am still up a good number on the year. My time horizon is a minimum of five years and ten is more realistic for my financial stocks so I have learned to ignore the day to day. When the money honeys look hangover in the morning and fund managers are puking under their desk again, I will drag out the cash and be a buyer. If the VIX crosses 35 I will be a seller of cash secured puts and option combos on depressed stocks. In the unlikely event that coordinated global intervention and money printing actually works I will be happy to sell some of my stocks at a huge premium to book value. Until then doing nothing is exactly the right move.

There is a mindset amongst my peers that because the casino is open you have to play. The best poker player I have ever known will walk around the poker room at the Borgota or Caesars looking for a game with an edge. . If he doesn’t see one he never sits down. The great horseplayers never leave the rail if they do not spot a race with a substantial edge. I look every day for a safe and cheap stock, an arbitrage opportunity or event driven situation. If I don’t see one I don’t trade that day. More money is made by individual investors by waiting for the inevitable big down draft in the stock market to buy and holding until the next euphoric rally than by trading every day. Doing nothing takes incredible patience and discipline but it is also wildly and consistently profitable. Short term market participants are trading against PHDs and supercomputers as well as the 1/10 of 1% of the population that is actually a great trader. All the edge is theirs and you are merely lunch. Wait until the market gives you the edge by creating a widespread inventory of safe, cheap stocks.

Until that happens life is good. Lisa got her first teaching job. The Orioles are competitive. Tom is firmly entrenched and successful in his profession. Maeve is busy being nine. Erin is excited about a new job in a friendlier work environment and still has not stabbed me in my sleep. How she puts up with me I will never know but I am damn glad she does. I have stacks of books to read, wine to drink and baseball to watch.

Most importantly, I am going to have palm trees in my yard.

Coal Carnage

A lot of the attention of value and distressed investors is starting to focus on the coal industry. As Patriot Coal (PCX) announced that they have begun to explore restructuring possibilities I have gotten several questions a day about coal stocks. I have talked about coal stocks and more specifically the bonds of some of the more leveraged coal companies in recent weeks and it is an area that that is worth exploring. It seems that nobody loves coal these days as everyone from the EPA to the utility companies are turning their back on this long time fuel source.
As with any energy sector when I have questions I call upon fellow Real Money contributor Glenn Williams. Glenn has more knowledge and insight into energy than anyone I have ever met. He is a valuable resource and if you are not reading him it is costing you money. In his words the coal outlook is not as bad as we first feared and probably not as good as some of the more bullish forecasts. The cola plants that have been closed were older less efficient plants and the electricity industry will continue to run the higher efficiency cleaner burning plants. Much of the recent switching to natural gas by utilities and industry has been a result of very low natural gas prices and the pendulum could easily swing in the other direction as coal supplies pile up amidst weak demand.

A recent report by the US Energy Information Administration gives some idea of what is going on in the industry. Although weak demand form electrical utilities lead coal consumption in domestic markets to fall by 18%, export demand increased by 32.6% on a year over year basis and more than 6% sequentially. Nobody loves coal right now except the emerging markets. Although they may pay lip service to the idea of reducing emissions the real interest of nations with fast growing economies is cheap energy to fuel industry and provide cheaper power to the developing middle class. Coal demand in the US will probably decline for a period of time it will eventually stabilize and I expect faster growing world markets to take up the slack in demand. The industry has problems but it is far from dead.

The same cannot be said for all the coal stocks however. I have pointed out in the past few weeks that some of the more highly leveraged coal companies may face severe distress. I would not touch the equity of companies like James River Coal (JRCC) or Patriot at these levels. Although they are asset rich the bear term outlook for the industry may not enable them to support their very high levels of debt service. I am becoming interested in the debt issued by these companies as they are trading below the predicted recovery rates by at least one major rating company. If they file for bankruptcy or otherwise reorganize you should emerge intact and with a profit. If the bonds remain performing or these companies are taken over by a better financed competitor you have a home run investment.

When I run credit scores on the coal companies I only find one that passes with flying colors. Hallador Energy (HNRG) is a small coal miner in the Illinois River basin that I mentioned a few months back as a potential buy. Predictably the stock has gone lower since then but they company has an Altman Z score of 3.8 and a Piotroski F score of 8. It is the only coal company I could finds that passed both tests. Peabody Energy (BTU) has a solid F score of 6 but a Z score of just 1.5. Consolidate Energy (CNX) has a very strong F-Score of 7 but a Z score of just 1.5 as well. Fundamentals show some signs of improving but there is some financial risk for these companies if coal demand and pricing remains weak.

I do not see insiders at the coal companies flocking into the shares yet either. So far only Arch Coal (ACI) has what I would call positive insider activity. We have seen some buying in the past few months as this stock has seen its price plummet. The stock is cheap on a price to tangible book basis but the Z score of.8 and F-score of just 4 indicate the company could struggle for some time yet.

The carnage in coal has caught my vulturistic eye. However I have done much in the sector yet. I had a small partial fill on some Arch Coal puts last month and I expect those will be put to me in June at a small loss. I will be a buyer of Hallador below tangible book value of $5.78 if the price should continue to decline. I have bids in for James River and Patriot well below market hoping to catch a blow off in upcoming weeks on additional bad news flow.

The well fed vulture is a patient vulture. The coal industry is close to a solid distressed opportunity but judging by credit scores and insider activity we are not quite there.

If You Can’t wait, Be Careful

Every once in a while my aimless roaming about dark corners of the market pays off with a solid idea that might have been overlooked. Last night in a discussion with a fellow investor he pointed out that some investors were either not in a position, or of the temperament, to wait for the market to fall into a depressed state before putting money to work.  He felt that this condition may apply to income oriented investors in particular as may need the income now and may have to commit the unforgivable sin of spending capital if they are forced to wait for a better entry point. I have to admit this is a valid consideration.

I spent some time thinking about the idea this morning. I can see where some folks may need or simply have a strong desire to get their income oriented money to work now rather than later. Even where this is this case I do not think you can abandon sound principles. I want to maintain some measure of long term safety while collecting my dividends and also want the prospect of inflation beating performance. I want companies in this buy it now portfolio that have sound fundamentals and the prospect of future dividend increases.

I sat down and ran a basic screen looking for stocks that paid at least 3% in annualized dividends and had a solid history of dividend growth. As a measure of financial strength and potential for appreciation I used the Piotroksi F score. I have found this measure to be one of the best indicators of financial and operating improvement and companies with the two highest rankings would seem to offer a certain amount of financial safety in my opinion This a simple screen but it turned up some stock that I think income investors could buy and sleep at night while collecting their dividends.  These stocks will still get hit in a broad market decline but history shows us that stocks with these characteristics  are able to continue paying generous dividends and rebound quickly as the market recovers.

Some of the names will be familiar to income oriented investors. Reynolds American (RAI) is one of the stocks uncovered by the screen. Although tobacco stocks are widely hated by many investors this company has better than doubled its dividend over the past decade and score a solid 8 on the F-score scale. The two highest ranked stocks are mutual fund provider Waddell and Reed (WDR) and Akzo Noble (AKZOY), the Dutch paint and chemical company. Both have F-scores of 9 and respectable dividend yields.

As attractive as these two income stocks might be they are not the hidden gem I uncovered. I found a smaller bank in Ohio, of all places, that has a very high F-score of 8 and pays a generous 6.5% dividend.  United Bancorp (UBCP)) is a small capitalization bank located in Martins Ferry. The company has 20 banking offices and is located right along the borders of West Virginia and Pennsylvania. More importantly from an investors point of view it is right smack in the middle of the Marcellus and Utica oils shale fields.

Although the shares trade at a slight premium to book value this is a close to a perfect little bank as you may ever find. Nonperforming assets are just 1.52% of total assets. Loan loss reserves are 90% of potential exposure. They have maintained adequate capital even while paying a substantial dividend. The dividend today is 60% higher than it was a decade ago. Insiders own 20% of the bank and have a strong incentive to grow the bank and the stock price over time. The results of this careful stewardship are reflected by the fact that they have not had a loss in the past five years of difficult operating conditions for small banks.

I prefer to wait to get the bulk of my capital to work when Mr. Market is in his highly depressed phase but if you have to get money to work now a focus on dividends, sound balance sheets and superior prospects is the best way to select a portfolio. This screen can help you find the type of gems that enable you to get paid now and reduce risk.

Originally Published 5-31-12 as a Real Money Column