Everyone likes to get something for nothing.
Whether it's a hot breakfast with your hotel room, a car
with an oil change or an order of fries with a hamburger, it's
always satisfying to feel like you're on the receiving end of a
good deal. A little something to sweeten the pot makes us feel good
about spending a few bucks.
So let me ask you: How'd you like to get your hands on a
billion-dollar business for absolutely nothing?
Zilch. Nada. Nichts. Don't worry. No strings attached. No salesman
will visit your home.
How's this possible? It's not hard: All you need is a brokerage
The secret to finding these companies is to learn to love the
. Once you do, it won't take you long to figure out how to
determine what a business is worth. The top part of the balance
sheet lists the company's assets. The bottom lists liabilities. The
third part is the (hopefully positive) difference between assets
and liabilities. This is called shareholder equity or "book" value.
If you sold all the assets and paid all the debts,
is what would be left over.
Say a company has $200 million in book value but has a
cap of $600 million on the stock market. Why the premium to what
its assets are worth?
Because a company is worth more than the sum of its parts. A
company isn't just desks, computers and
, it's also creative innovators, passionate entrepreneurs, and
capable laborers and support staff. None of them, of course, can be
listed on a balance sheet. But the difference between book value
and market cap can be seen as the intangible value of the business
. It's the market's assessment of the company's future ability to
Companies typically trade at a premium to book value. An S&P
500 company has an average price-to-book ratio of 2.0. This means
half of the average company's
is backed up by its
and the other half is attributable to the intangible value of its
But "average" is just that -- an average. Some companies will be
far above it, some below. Take
, for example. It trades at 12.5 times its book value. Clearly
investors have decided that Amazon's chances of continued future
profits are very good.
But not every company enjoys such a favorable valuation. Some trade
for less than book value. In these cases, the market has said that
these companies are worth less than the cash that would be left
over if the business was liquidated. These are the companies whose
businesses you can buy for free. You paid for the assets, you get
their future results for free.
Now to the fun stuff...
I sought U.S. companies with a market cap of greater than $10
billion and a price-to-book ratio of close to 1.0. Only 10
companies made the list. Here are my five favorites.
1. Wells Fargo (NYSE:
. The $131 billion bank is trading at almost exactly its book
value, which means you get the banking operations and the world's
best credit managers for nothing. That business has generated a
profit for the past five quarters and the past five years, a feat
few large banks can match.
2. WellPoint (NYSE:
. This health insurer covers almost 70 million people, or nearly a
quarter of all Americans. It, too, has remained profitable for
every minute of the Great
. What's the trouble? It insures people who have jobs, and the
market doesn't see any jobs being added in the near future. That's
myopic. As the
rebounds and hiring picks up, the market should return WellPoint to
a more reasonable valuation.
3. State Street (NYSE:
owns a bank and an (increasingly international)
business. It operates at a gorgeous 22.9%
net profit margin
, which is pretty close to
, and State Street also has remained solidly in the black during
the downturn. Plus, it's added billions to its book value in recent
years, which is always good news for long-term investors.
4. Annaly Capital (NYSE:
. I love this real-estate investment trust (REIT). It borrows money
at very low cost during the short-term and uses the cash to buy
government-backed mortgages that pay a higher rate. The company
rolls the loans between banks and pockets the spread between the
net interest income and net interest cost, distributing 95% of it
to shareholders. The
is 14.7%, which gives investors a nice income stream while they
wait for the market to get its act together and put a reasonable
value on this company.
Bonus Pick: Prologis (NYSE:
. Hey, after talking about getting something for free, I had to add
in a bonus. Prologis owns warehousing space. The company has taken
it on the chin because of investor anxiety about soft consumer
demand, which have some merit, as the company has posted an annual
loss in two of the past four years Nevertheless, shares have
received a strong vote of confidence from institutional investors,
which own just about all its shares. The stock also sports a 4%
Action to Take -->
All of these stocks are rebound plays. There isn't a single one of
them that is even close to its fair valuation. At a price-to-book
ratio near 1.0, they have significant upside just to reach the
average, though none of these outstanding companies has a
reputation for being "average." They're excellent companies with
strong upside, and each of them is worth adding to your
Disclosure: Andy Obermueller and/or StreetAuthority, LLC hold a
position in NLY, WFC.