These Stocks are Even More Undervalued than You Think...

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It's getting awfully tempting to book profits on any stocks that you've seen boosted by the current rally. Even if you make that move, it's an open question as to whether you should redeploy your funds into other less expensive stocks, or simply just sit tight with a rising cash position. After all, the stock market has started to give back recent gains, and technical analysts are declaring stocks to be in "overbought" mode and ripe for a fall.


 

For long-term investors, there are ample reasons to stay committed to this market. But it is what you choose to focus on that may make all the difference. In light of a possible pullback, it may be wisest to focus on stocks with material downside support. And there is always no greater tangible representation of a floor for a stock than a company's assets.

This is half of the approach I take in my $100,000 Real-Money Portfolio . The other half is to ensure through my research that they have ample upside. We'll get to that part in a moment...

I've focused a number of times in the past on stocks trading below tangible book value . This time, I'm adding a new twist, focusing on this group while seeking out companies that are expected to be profitable in 2012 and 2013. Those profits should boost cash levels or help pay down debt, pumping up book value in the process.

All of the stocks in the table below are trading at less than 90% of tangible book value right now, and this number drops even further when you project out what the balance sheet will look like at the end of 2013, assuming profit forecasts are met. (This list was predominated by banks and insurers, which I've weeded out to come up with a short, manageable list. Here's what's left...)



 Now, let's look at this group after incorporating the projected profits into book value.

 

Looked at in this light, these stocks are even better bargains. For example, greeting cards maker American Greetings (NYSE: AM ) trades for 73% of tangible book value right now, but just 61% of what tangible book value may look like at the end of 2013.

In many instances, these book values are so compelling simply because any companies looking to enter into these industries could pay a nice premium for some of these assets and still get them on the cheap. For example, Royal Caribbean Cruises (NYSE: RCL ) has spent billions constructing an armada of fairly new state-of-the-art cruise ships. Those ships are worth roughly 50% more than the current stock market value implies.

Two other stocks to consider...

1. Aircastle (NYSE: AYR )
I wrote about this aircraft leasing firm and its peers about 18 months ago, which you can read about here . The stock has risen more than 60% since then. And it's still quite undervalued, trading at a 31% discount to tangible book value.

Here's the crazy thing: Aircraft leasing remains quite profitable, even in the face of challenging industry conditions. Assuming this company continues to deliver results in line with analysts' forecasts, tangible book value will rise from $19.74 today to $22.62 by the end of 2013. The stock's move from around $8 in late 2010 to a recent $13.50 only begins to reflect that gain.

The decision by AMR, parent company of American Airlines, to go into bankruptcy surely gave this industry a scare. This could have enabled the carrier to simply walk away from plane leases. But that doesn't appear to be the case, because AMR will mostly retire planes that were at the end of their leases anyway. In any event, Aircastle has no direct relationship with AMR anyway.

2. Valero Energy (NYSE: VLO )
For many years, turning crude oil into gasoline and other products was a lousy business. It required huge amounts of capital and brought lousy returns simply because the industry had too much capacity. As a result, Valero has never seen EBITDA margins rise above 4% in any of the past four years.

The good news: a number of East Coast and European refineries have been shuttered, and industry capacity is now a lot closer to demand. You can already see the positive benefits accruing to Valero, which recently noted that it is exporting a rising amount of gasoline and diesel fuel to Europe to make up for lost capacity.
 
This sets the stage for a move toward 5% EBITDA margins this year, a level the company hasn't seen since 2007. To boost margins further in 2013 and beyond, Valero is making heavy investments in its Port Arthur, Texas, and St. Charles, Louisiana, refineries, which should boost capacity while lowering operating costs.

Merrill Lynch sees shares rising from a recent $25 to $36, noting that Valero has "significant organic growth and one of the lowest multiples in the sector." That target price happens to coincide with what Valero's projected tangible book value per share will likely be by the end of 2013.

Risks to Consider: Investors have been focusing on growth stocks recently -- not these kinds of value plays. So a further rally may keep the spotlight on the riskier stocks in the market.

Action to Take --> If you've seen your portfolio rise in value in recent months, then you can sleep better at night by adjusting your portfolio toward more defensive stocks. The stocks in the table above are a fine place to begin your research.

[ Note: You can also follow along with my $100,000 Real-Money Portfolio trades free for a limited time. Simply click on this link to sign up .]


-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of VLO in one or more if its "real money" portfolios.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas

Referenced Stocks: AM , AYR , RCL , VLO

David Sterman

David Sterman

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