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
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
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
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
S&P Cheap by Historical Standards
Currently the median price to book multiple on the S&P is 2.6,
well below its 10-year median of 3.6. 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 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
than their current stock price.
1. Fly Leasing Ltd
Return on Equity (TTM): 17.0%
Return on Equity (5yr Avg): 11.5%
Price to Book Value: 0.7
Price to Tangible Book Value: 0.7
2. Tech Data Corp
Return on Equity (TTM): 10.8%
Return on Equity (5yr Avg): 8.9%
Price to Book Value: 0.9
Price to Tangible Book Value: 0.9
3. Kelly Services
Return on Equity (TTM): 9.6%
Return on Equity (5yr Avg): 3.6%
Price to Book Value: 0.7
Price to Tangible Book Value: 0.8
The Bottom Line
Think of tangible book value as what would be 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
and Editor of the
Income Plus Investor service
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