Long before the days of growth stocks, investors used to search
for value in stocks that were trading for less than the net assets
on their balance sheets. It was a tried-and-true formula for
protecting your downside while searching for upside.
The stock market's original gurus - Columbia Business School's
Benjamin Graham and David Dodd - laid out a pretty simple premise
in their 1934 book
: Since we have no crystal ball that tells us where a business is
headed, we can only place a value on things we already know. And we
know that if a company chose to shut down tomorrow, sell off its
assets, pay off its debts, and turn it all into cash, we can get a
sense of what value exists. This is a company's tangible
, which excludes non-cash
items such as goodwill and amortization. And as those esteemed
authors noted, if the stock market's value of a company (known as
market capitalization) is less than that tangible book value, then
you've got a potential bargain.
In theory, a stock's value should never fall below tangible book
value, because investors should bid shares back up right to the
point where those two values are equal -- also known as "trading at
book." But the market is never that efficient. Sometimes, a stock
will fall below its intrinsic worth and trade well below tangible
book value. In bull markets, you can always find a few dozen stocks
trading below book. And in markets like the current one, you'll
In some instances, investors are right to ignore stated book value.
For example, if a company is losing money, cash will decline and so
will book value.
, which kicks off
every quarter, is a fine example. Tangible book value has fallen
from $12.76 per share at the end of 2007 to a recent $7.40. Shares
fell down to just $5 at the height of the economic crisis, because
investors knew that tangible book value would keep shrinking in the
face of open-ended losses.
In other instances, a company will carry assets at their cost, but
those assets may no longer be worth as much. For example, oil
Western Refining (
spent billions of dollars to build massive facilities to produce
gasoline and diesel fuel. But the industry is awash in too much
capacity, and neither firm would get all of its money back if they
wanted to sell some of those refineries.
In some extreme instances, these stocks not only trade below book
value, but below cash levels. Telecom equipment maker
Sycamore Networks (Nasdaq: SCMR)
is valued by investors at roughly $500 million. Yet Sycamore has
roughly $635 million in short and long-term investments.
Presumably, a rival could come along and pay a 25% premium to the
and get the whole business for free by sucking out that cash. This
is a clear instance where Graham & Dodd would be scratching
I ran a screen and found hundreds of stocks trading below book.
I've greatly condensed that list for you by, among other things,
placing a $500 million minimum on market value. I've also
eliminated a number of financial services firms due to anomalies
associated with the stated values of their assets and liabilities
(though we retained some financial names on the list that do
represent clearly-valued balance sheet items).
Tangible Book Value Per Share
Price as Percentage of Book Value
|OM Group (
|Bristow Group (
|Ameren Corp (
|Ingram Micro (
|Kaiser Alum. Corp.
|Questar Corp. (
|Helix Energy (
|Piper Jaffray (
Ingram Micro (
As the table shows, some stocks trade for sharp discounts to book
value. And many of these stocks have likely found a floor, even if
the rest of the market slumps further. For example, shares of
Ingram Micro, the world's largest distributor of office equipment
and electronics, have fallen to just 85% of tangible book value on
fears that European sales will slump in coming quarters.
But value investors should be ready to pounce. That's because
tangible book value has risen from $10.59 in 2004 to a recent
$18.32. Almost all of that gain is attributable to a rising cash
hoard, which now approaches $1 billion. And that figure is likely
to keep rising, as Ingram Micro should remain nicely profitable,
even if European sales slump. Ingram Micro has never lost money
(excluding a one-time charge in 2009) in its history.
There are two things you need to know about this long-standing
department store chain. Management has a very spotty track record
in terms of sales and profit growth, and the company is sitting on
a gold mine in terms of real estate . The company's portfolio of
stores is likely worth at least the $3 billion that it is being
valued on its books. Yet the whole company is valued at less than
half of that figure.
Dillard's results are sharply improved this year, as earnings per
share should more than double. But the country is still awash in
too much retail space. So Dillard's would need to wait before
trying to raise cash by selling any stores. But if it comes to
that, investors should note that many of Dillard's stores are
situated in prime locations. Meanwhile, the whole company is valued
at just 69% of tangible book value.
Royal Caribbean (
A cruise ship just isn't worth as much anymore. They cost oodles of
money to build, and are currently being packed in with
discount-seeking bargain hunters. Many ships are barely generating
more profits than the loans taken out to pay for them. Part of the
problem stems from a glut of cruise ships that were built while the
economy was humming. It takes several years to build a ship, so new
ones kept coming, even as the economy slumped.
But over time, demand for cruises should catch up with supply, and
the value of the cruise ships built by Royal Caribbean will start
to rise back to the value of their construction costs. Shares would
need to rise by 21% just to get back up to tangible book value.
Action to Take --> These value situations require patience.
Indeed, Graham & Dodd preached "
Buy and Hold
." In the meantime, these stocks are likely to fall by less than
other stocks that trade far above book value. So you get (eventual)
reward without too much risk. Of these companies profiled, Ingram
Micro is the most likely to see tangible book value keep rising,
while investors in Royal Caribbean and Dillard's will need to wait
for the market for their assets (ships and real estate ,
respectively) to become better appreciated.