2 Blasts from the Past

Let's Talk About Making Money

Book Value is Important

Two Solid Companies Selling at Bargain Prices


I hope my missive today finds you healthy and safe.

Let's talk about making money. One of the best ways to make money is to ensure that you don't lose money, or at the least, you don't lose your shirt. When I recommend a stock to buy, I always make sure the company is solid. A couple of quick ways to test the quality of a company are to check the company's ability to pay dividends and to check its balance sheet. Today I'll look at balance sheets - I discussed dividends in last month's Cabot Wealth Advisory .

As I have said before, I am not an accounting professor, so I'll keep this simple. Every public company issues a balance sheet whenever sales and earnings are reported, which in the U.S. is always quarterly. Every balance sheet is divided into two sections: (1) Assets and (2) Liabilities and Shareholders' Equity. One of the best ways to ascertain a company's quality is to compare the book value per share to the stock's current price. The numbers to make this calculation are found on the balance sheet.

I find that a lot of investors are unfamiliar with book value and book value per share, so, a quick definition is in order. Book value is shareholder's equity (also called retained earnings) which is a number found near the bottom of a company's balance sheet. Book value per share is simply the shareholder's equity or retained earnings divided by the number of common shares outstanding. The number of shares can be found either on the balance sheet or income statement.

Is book value per share important? By itself, no. But when compared to the company's stock price, it's enormously important. In short, quality companies with low price-to-book value per share ratios (P/BV) have outperformed companies with high ratios for the past three-, five- and 10-year periods.

I recently scoured my databases to find the best companies with low P/BV ratios. I found that 140 companies in my database of 1,000 companies have P/BV ratios of 1.20 or lower. I used several additional criteria to narrow the list of 140 companies by also requiring: Standard & Poor's Earnings/Dividend ratings of B or better, low price-to-earnings (P/E) ratios, dividend yields of 1.0% or higher and good earnings prospects for the next 12-month and five-year periods.

My search turned up a couple of companies with storied pasts. Both companies had spectacular rises in years past before collapsing when new technologies passed them by. The companies have reinvented themselves and could become industry leaders again in just a few years. The stock prices of the two companies are bargains now and the companies look attractive to me.


Corning, Inc. (GLW: 12.60) Founded in 1851 with headquarters in Corning, NY, Corning evolved from an old-line housewares company to a leading maker of liquid crystal display (LCD) panels, fiber optic equipment, and emission control equipment.

Corning is operating in several leading growth sectors: making glass for flat-screen TVs, smartphones, tablet computers and other electronic devices; manufacturing fiber optic equipment used by the telecommunications industry; and developing pollution control equipment to meet new emission standards.

I expect sales to increase 6% and EPS to climb 7% in 2013 and accelerate in 2014 and beyond. New products, such as Gorilla glass which is extra strong and clear, and ultra thin Willow glass could easily push sales and earnings higher than expected.

GLW shares sell at a 14% discount to book value, sport a low current P/E of 9.8, and provide a dividend yield of 2.9%. The company's balance sheet is very strong with $4.25 per share in cash and low debt. GLW's stock price will likely almost double within one to two years.


Xerox (XRX: 6.92) provides document equipment such as printing and publishing systems, digital copiers, laser and solid ink printers, fax machines, and digital multifunctional devices, which can print, copy, scan and fax. XRX's acquisition of Affiliated Computer Services in 2010 more than doubled the company's size and added a much needed steady income stream from long-term service contracts. Operating efficiencies and cross-selling opportunities, especially overseas, are resulting in a brighter outlook for the new Xerox.

XRX's printing operations aim to capitalize on a shift in the document industry away from older copiers. The change to digital technology, a transition to color, and a move to the company's exclusive less expensive solid-ink ColorCubes bodes well for future sales. I foresee EPS of 0.95 in 2013, 6% higher than a year ago before accelerating in future years.

The company is staying ahead of its competitors in new technology for its printers and copiers, but demand from corporations will remain soft until the global economy begins to improve. I continue to like Xerox, because the stock price is a steal and the Affiliated Computer acquisition holds great potential. Management is well aware that selling software and providing services will generate higher growth and more profits than sales of printer and copier hardware.

XRX shares sell at 7.7 times current EPS, which is a great price for a company with accelerating sales and earnings growth. The stock price is currently 30% below book value, which is unusual. And the dividend yield of 2.5% is a plus. The company's new technologies and recent acquisitions add a needed spark to a company that has endured several transformations. XRX's stock price will likely reach my sell target within 1 to 2 years.

I will continue to follow Corning, Xerox and other blue-chip, high-quality investments in my Cabot Benjamin Graham Value Letter. My next issue, coming soon, will focus on undervalued Canadian stocks with accelerating earnings. I hope you won't miss it!

Finally, I wish all you and your loved ones a happy holiday season and a healthy, prosperous new year!


J.Royden Ward

Editor of Cabot Benjamin Graham Value Letter

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Two Solid Companies with Good Value

Ten Best Dividend-Paying Companies

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

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

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