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
has started to give back recent gains, and technical analysts are
declaring stocks to be in "overbought" mode and ripe for a
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
. 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
will look like at the end of 2013, assuming
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:
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:
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
Two other stocks to consider...
1. Aircastle (NYSE:
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
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,
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:
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
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
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
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.
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.