There are many ways to value a company. One of the most
conservative ways is to take the value of a company's assets and
subtract its liabilities. What's left over is the company's
book value
.
Of course, the value of a company's assets and liabilities are
often subject to estimates by management and can include
hard-to-measure intangibles like goodwill, patents and intellectual
property. But if you strip out intangible assets and focus just on
hard assets, and subtract the liabilities, you're left with the
more conservative
tangible book value
.
Essentially, this is the what's left over for shareholders if a
company were to liquidate all of its assets and pay off all of its
obligations.
Catch-22
So how much are you willing to pay for a company's net assets? This
usually depends on a how well the company is doing. Typically
companies with strong returns on equity (ROE) and thus growing book
values trade at high multiples to their book value.
But historically, stocks that trade at low price to book (P/B)
multiples tend to outperform those with high price to book
multiples.
S&P Cheap by Historical Standards
Currently the median price to book multiple on the S&P is 2.4,
well below its 15-year median of 3.8. And the median ROE is
increasing. That's a sign that the stock market may be undervalued.
And if you look hard enough, there are some really great values out
there.
3 Cheap Stocks
Theoretically a company shouldn't trade below its tangible book
value. But I've found 3 that are currently doing just that, while
also maintaining a solid ROE.
In other words, if these companies were to cease operations today,
sell off all of their tangible assets and pay off all of their
liabilities, what's left over would be worth
more
than what the market is currently pricing them at.
1. Valero Energy
(
VLO
)
Return on Equity (
TTM
): 16.7%
Return on Equity (5yr Avg): 13.0%
Price to Book Value: 0.7
Price to Tangible Book Value: 0.7
2. American Greetings
(
AM
)
Return on Equity (
TTM
): 12.1%
Return on Equity (5yr Avg): 9.6%
Price to Book Value: 0.7
Price to Tangible Book Value: 0.7
3. Goldman Sachs
(
GS
)
Return on Equity (
TTM
): 8.4%
Return on Equity (5yr Avg): 19.2%
Price to Book Value: 0.7
Price to Tangible Book Value: 0.8
The Bottom Line
Tangible book value is what's left over for shareholders if a
company were to liquidate all of its assets and pay off all of its
obligations. It is rare for stocks to trade below this level,
especially ones with positive returns on equity. But these 3 are
currently doing just that.
Todd Bunton is the Growth & Income Stock Strategist for
Zacks.com
and Co-Editor with Steve Reitmeister of the
Reitmeister Value Investor
that snaps up discounted value stocks and sells them after the
market realizes their true worth for long-term gains.
AMER GREETINGS (
AM
): Free Stock Analysis Report
GOLDMAN SACHS (
GS
): Free Stock Analysis Report
VALERO ENERGY (
VLO
): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research