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1. Buy understandable businesses
2. Buy cheap stocks. He likes to buy stocks at around book value.
3. Buy stocks that have little to no debt.
4. Buy stocks that are at new lows (preferably 2-3 year lows).
We have created a Walther Schloss Cheap Stock Screen with our All-In-One Screener, which has more than 120 filters. The criteria we set are:
1. Fundamental Tab: Interest coverage > 10
2. Altman Z-score > 2.99
3. Valuation Tab: Price-to-tangible-book ratio< 1
4. Historical Valuation Tab: Stock price is at maximum 25% above the three-year low.
While Walter Schloss did not use the Altman Z-score in his research, we use the combination of interest coverage and Altman Z-score to satisfy the requirement of “stocks that have little to no debt.” An Altman Z-score of higher than 2.99 indicates that the company is financially sound. This is the screenshot of the Walter Schloss Cheap Stock Screen.
The screen generated 55 stocks. Many of them do not have debt but traded at close to three-year lows. Most of the stocks are small caps. Only three out of the 55 stocks have the market cap of more than $1 billion.
If you are a Premium Member, you can check out the screen here. If you are not a Premium Member, we invite you a 7-day Free Trial.
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I replicated a similar screen and something worth noting is how many of the stocks have well known problems. However, those are the types of stocks that Schloss owned. On balance, the more stocks are hated, the more likely they are to be mispriced.