Bull markets can be broken into several phases. At first,
investors seek out large stable companies, tentatively stepping
into stocks while still a bit unsure if the rally will last. As a
rally builds, investors start to migrate into the tried-and-true
growth stocks, such as major Nasdaq technology stocks. Only after
abull market has been well underway do investors start to wade into
stocks that, as the British would say, are "cheap and cheerful."
After all, stocks that failed to participate in the first stages of
the market rally are likely less prone to profit-taking if the
suddenly hits a wall.
That makes this a good time to seek out stocks that are cheap in
the context of their balance sheets. I went looking for companies
that are valued at a point well below the hard assets on
theirbalance sheet . Specifically, I screened for stocks that are
trading at less than 80% of tangiblebook value (which is
shareholders' equity minus liabilities and intangible assets, such
as goodwill). I avoided banking, insurance and realestate
stocks, because theirbalance sheet figures may not always
accurately reflect current values.
Market Cap. ($M)
Tangiblebook value ($M)
|Aircastle Ltd. (
|Delta Petroleum Corp. (
|Dynergy Inc. (
|Eagle Bulk Shipping Inc. (
|Energy Conversion Devices
|Genco Shipping &
|Hercules Offshore Inc.
|Imation Corp. (IMN)
|Overseas Shipholding Group
|PHI Inc. (PHII)
|Radian Group Inc. (RDN)
|SkyWest Inc. (SKYW)
|Tecumseh Products Co.
|USEC Inc. (USU)
|Winn-Dixie Stores Inc.
Indeed abalance sheet doesn't tell you everything.
Eagle Bulk Shipping (Nasdaq:
Genco Shipping (NYSE:
Overseas Shipholding (Nasdaq:
, for instance, may look quite cheap relative to the value of their
dry-bulk shipping fleets. But there is a global glut of such ships,
so the current openmarket value of these vessels is well less than
it cost to build them.
Abalance sheet can also steadily weaken if a company is losing
money. That's whyshares of
Energy Conversion Devices (Nasdaq:
, a manufacturer of photovoltaic products, and
, a semiconductor maker, are not really cheap when you think about
what their balance sheets may look like a few years from now.
Yet real values abound. Here are two stocks from the table above
that look quite appealing in the context of tangiblebook value .
1. Aircastle (NYSE:
Even as global air traffic has rebounded, share prices for the
companies that buy (and then lease) planes still remain at a sharp
discount. In the case of Aircastle, its fleet of planes is worth
almost $1.3 billion, yet the company is valued at just $850
million. Why the disconnect? Because the company typically carries
a considerable amount of debt and investors recall that just a few
years ago, thatdebt load could have been lethal when demand for
airplanes slumped. Since then, debt has been coming down, and
barring a new global economic crisis, any lingeringbalance sheet
concerns are likely to recede.
I wrote about
a rebound for this sector
back in September and thoughshares of Aircastle have risen 35%
since then, they still look quite cheap. A few weeks ago, Citigroup
boosted their target price for the stock up to $17 -- 55% above the
current price -- which is roughly the value of what the company's
is projected to look like at the end of 2011. The fact thatshares
sport a 3.8%dividend yield is icing on the cake.
2. Hercules Offshore (Nasdaq:
I noted earlier that dry-bulk shipping stocks shouldn't tempt you
because the value of their ships is not likely to rebound
considerably thanks to a glut of existing and newly-built ships. At
first glance, a similar fate may appear to befall firms like
Hornbeck Offshore (NYSE:
. These companies own expensive oil-drilling rigs which have also
seen a downturn in value. But there's a key difference: drilling
rigs are only temporarily depressed while drilling activity in the
Gulf of Mexico remains slow to rebound. All signs point to rising
drilling in the Gulf later this year and into 2012 as regulatory
barriers are lifted. (The federal government banned drilling in the
Gulf of Mexico's deep waters after the April 20, 2010 explosion of
the Deepwater Horizon drilling rig, which killed 11 people and
became the largest offshore oil spill in U.S. history.)
The lift of the drilling ban would be great news for Hercules
Offshore, which has seen its stock fall to less than 40% of
tangiblebook value , thanks to a highdebt load and temporarily
diminishedcash flow to service that debt. As drilling activity
picks up, so should Hercules'cash flow , and those debt concerns
Make no mistake: investors are unlikely to rewardshares all the way
up to tangible
of $8.16 a share while debt remains high. But I fully expect some
of the price/book gap to narrow, pushing that metric up to 0.60.
That wouldyield a 50% upward move inshares . And you need not be
concerned that Hercules is expected to post a loss for each of the
next three years. Actualcash flow in each year is likely to exceed
$1.00 a share, which could help the company slowly pay down debt.
Action to Take -->
Stocks that trade at a sharp discount to tangible book value have
often hit rough sledding. In some instances, such as Aircastle,
those rough patches appear to be at an end, while for firms like
Hercules Offshore, they look set to end in the next 12-18 months.
These stocks may be slow to rebound, but they also have a clear
floor underneath them -- which is not a bad thing when the market
is pushing many stocks up to multi-year highs.
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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