When the
economy
is growing, you need to focus on income statements, looking for
signs that sales and profits can grow at a heady clip. In tougher
economic times, investors pivot over to the
balance sheet
, looking for areas of support to gauge how much further a stock
might fall. And there's no truer gauge of a company's balance sheet
strength than its tangible
book value
(also known as "shareholder's equity," minus any
goodwill
).
In theory, a stock should never be worth less than a company's
stated book value. In reality, investors often sell a stock without
noticing the balance sheet, and the tangible book value can become
much more valuable than the company's stock price. Back in 2002,
dozens of solid companies suffered just such an ignominious fate.
Yet by 2004 many of these "below book" stocks rebounded sharply.
It's happening again. The recent
market
rout has created a veritable bonanza of "below book" names. I've
weeded out all financial services stocks, and still managed to come
up with nearly two dozen stocks that now trade well below tangible
book value.
Importantly, there's little reason to think that book value will
shrink in these challenging economic times. Every stock on this
list was profitable last year and is expected to be profitable in
2011 as well. Those profits should boost book value even
further.
Of course you'll need to get a sense of what assets are on the
balance sheet to truly verify that the board of directors could
gain top dollar for the assets if the company was to be liquidated
(which is the real base scenario for "below book" names). As an
example, you should question the value of oil refiners such
Valero Energy (NYSE:
VLO
)
and
Marathon Oil (NYSE:
MRO
)
. The energy sector is awash in too much oil refining capacity, so
if these companies looked to sell their refineries, they'd likely
get a lot less for them than what they paid to build them -- which
is the value carried on the balance sheet.
In a similar vein, you might want to cross
Great Plains Renewable Energy (Nasdaq:
GPRE
)
and
Sunpower (Nasdaq:
SPWRA
)
off of your list. These companies have poured millions of dollars
into facilities that can produce ethanol, and solar panels,
respectively. Demand for each of these products is now weaker than
many previously forecasted, rendering their manufacturing
facilities less valuable in the eyes of potential purchasers.
Yet other companies have verifiably attractive assets. Much of
JetBlue's (Nasdaq:
JBLU
)
airline fleet is quite young and very fuel efficient. If the
carrier was put up for sale, rival airlines could afford to pay a
nice premium to the current share price and get an attractive
fleet. As an added bonus, JetBlue holds the rights to many
attractive gates at major East Coast airports, and yet it doesn't
even list their value on the balance sheet. Although
Delta (NYSE:
DAL
)
remains as
my favorite current airline stock
, Jetblue's below book valuation is awfully tempting.
Two more stocks to buy
It's unusual to find a large blue chip on this list, but with $55
billion in annual sales,
Bunge (NYSE:
BG
)
surely qualifies. This company is involved in a wide range of
agricultural businesses, from fertilizer sales to oilseed
processing to wholesale sales of cooking oil. Business is solid
right now -- the company has topped quarterly
profit
estimates by an average of 25% in the past four quarters, and (
earnings
per share)
EPS
is likely to be a record $6.50 this year.
Shares
are getting little affection, though, recently falling in tandem
with the broader market. In fact, at a recent $59, the stock is 17%
below tangible book value and an even broader discount to Merrill
Lynch's $79 target price. They figure shares are worth 10.5 times
their 2012 EPS forecast of $7.50.
Another favorite book value play of mine right now remains
Micron Technology (Nasdaq:
MU
)
. About a month ago,
I told you
of Micron's strong position in the areas of memory and storage for
the next generation of tablet computers and smart phones.
That transition is still underway, and quarterly results (and the
stock price) are currently being constrained by tepid results in
the company's legacy DRAM business. In its fiscal fourth quarter
(ended August), Micron lost $0.14 a share, below analysts'
forecasts, due to recent weakness in DRAM pricing. That
net loss
obscures the fact Micron still generated $354 million in operating
cash flow
in the quarter.
More importantly, tangible book value stands at a very healthy
$8.15 billion, 42% higher than the company's current
market value
. In response to the lagging valuation, Micron is using its $2.2
billion cash balance to buy back stock. I still think shares of
Micron are headed beyond the stated book value and toward $12. At
that price, shares would trade for five times projected 2012
free cash flow
of $1.5 billion, on an
enterprise value
basis.
Risks to Consider:
Below-book stocks lack catalysts, except that they're cheap. If
any of these companies failed to maintain profitability, then
accumulating losses would erode book value.
Action to Take-->
The charm of these below-book names is their clear underlying
asset
support. This makes them defensive in the current environment,
while sporting meaningful upside when the market rebounds. My
personal favorites mentioned above are a good place to start, but
you might also find a gem in the list above during your own
research.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.