In an ideal world, the entire basket of U.S. stocks would be
arranged in terms of the value they represent. The most
richly-valued stocks would be obvious sell candidates, and the most
inexpensive stocks would all be bought up.
But that's not how the
market
works.
From day to day,
overvalued
stocks can climb yet higher, while undervalued stocks can fall and
fall. Some of them fall so much that they move far below any
logical, rational level. I'm talking about stocks that are valued
well below the tangible
book value
that can be found on the company's
balance sheet
.
These stocks can stay "below book" for awhile, as many stocks
did throughout 2002 and again in 2009. But eventually logic
prevails.
Well, 2012 brings us another trove of "below book" value plays.
I found more than 100 companies out of the 1,500 that are in the
S&P 400, 500 and 600 that trade below tangible book value.
To narrow the list, I am looking at stocks that trade for less
than 80% of tangible book, have seen their book value rise in each
of the past three years (meaning they are actually adding value to
the company), and should see book value rise even more in 2012 and
2013 because they are expected to remain profitable.
I found 20 stocks that fit the bill, and fully half of them are
insurers.
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Why are these insurance stocks so cheap? Because interest rates
are so low and they can't generate their historical levels of
profit
margins. Still, all of these insurers saw book value rise, even in
the last downturn, and should keep raising book value as expected
profits fatten up the balance sheet even more.
You'll find another 10 deeply undervalued stocks in this
table.
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I've got two personal favorites here. The first is tech
distributor
Ingram Micro (NYSE:
IM
)
, which will admittedly never be a richly-valued stock due to its
low growth and skimpy profit margins. This stock has often traded
between 95% and 100% of tangible book value, however, which is why
it's so appealing right now. A move back the midpoint of that range
implies roughly 25% upside, and that low book value measure implies
little downside. Moreover, analysts expect Ingram Micro to earn
roughly $4 a share over the next 24 months, implying that tangible
book value may end up around $25 a share by the end of
2013.
The forgotten upstart
A decade ago, consumers were buzzing about a new airline service
called
JetBlue (Nasdaq:
JBLU
)
. Consumers gave the carrier very high marks, and investors loved
the fact that it had a brand new fleet of fuel-efficient airplanes.
Back in 2003, this was one of the hottest stocks in the market,
briefly touching $30. These days, the stock is down to $5.
What went wrong? In a nutshell, other carriers improved their
operations, closing the gaps of operational efficiency and customer
loyalty. And those new JetBlue planes are now a bit older and now
require more maintenance than before. Still, the stock doesn't
deserve to be THIS cheap. Investors are overlooking the fact that
JetBlue has never generated an operating loss in its history, has a
strong presence in the coveted Eastern seaboard, and is still in
growth mode. Sales are expected to rise 7% in 2013, while
earnings
are expected to rise 25% to around $0.70 per share. Not bad for a
$5 stock.
A still-strong brand, lean cost structure and valuable set of
assets is why some have speculated JetBlue will end up as takeout
fodder in an industry that continues to consolidate. Regardless,
trading well below tangible book value, it's hard to see how
shares
can fall much further from here.
Risks to Consider:
Even as investors have few reasons to sell these deep value
stocks, it may take a firmer
economy
before buyers step in.
Action to Take -->
You should look into this list further. Even as these stocks
offer
tangible downside protection, they could rebound just as sharply as
higher-beta stocks, giving them a nice blend of offensive and
defensive characteristics.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.