Ben Graham, the father of value investing, liked to construct portfolios with stocks that traded with a low multiple of book value, usually under two-thirds book value. That's how he spotted bargains.
Many believe that buying stocks below their book value may help to protect against the potential downside. It also could mean big upside if and when the masses start to warm to the story and to bid the stock higher. (Learn more on book value, in our article Digging Into Book Value.)
Everyone Wants a Bargain
Finding stocks under book value isn't always easy. Savvy investors are already aware of this strategy, and so when such bargains arise, they are often scooped up in short order. The widespread use of screening technology by retail and institutional investors has eliminated much of the detective work that Graham was forced to do during his time. (To learn more, read Getting To Know Stock Screeners.)
It is important to note that this method of investing is not a guarantee for success. Some stocks that appear "cheap", are this price for good reason. It may take many years for the masses to appreciate them, or they may never be discovered at all. Some companies that trade below their book value deserve to because they may have problems and will never be an industry leader.
With all of that in mind the following is a list of stocks that traded at a price-to-book ratio of less than 1 which may be worthy of follow-up research.
|
Company
|
Market Cap
|
Price/Book
|
|
American International Group
(NYSE:AIG)
|
60.7B
|
0.77
|
|
Briggs & Stratton
(NYSE:BGG)
|
770M
|
0.91
|
|
Citigroup
(NYSE:C)
|
106.8B
|
0.95
|
|
Dillard's
(NYSE:DDS)
|
1.01B
|
0.41
|
|
Jones Apparel
(NYSE:JNY)
|
1.75B
|
0.90
|
|
Data as of market close September 3, 2008
|
Jones Apparel Looking Good
The name Jones Apparel probably doesn't ring a bell, but some of its licensed brands might. Ever heard of Gloria Vanderbilt, Nine & Company and Evan-Picone? Although consumers have been reluctant to loosen their purse strings lately, Jones Apparel is doing just fine. As evidence, I'll point to its second quarter results.
In the second quarter, Jones Apparel saw adjusted earnings per share of 20 cents. This is well north of the 12 cents per share the Street had expected. Given the lackluster operating environment, it was interesting to hear company president and CEO, Wesley Card say, "Comparable store sales for all of our concepts were essentially flat for the period, and we achieved a 5.8% increase in comparable store sales in our footwear stores."
At present Jones Apparel is expected to earn $1.25 per share this year and $1.40 per share next year. That's appealing in my book given that the stock currently trades at $20.51. Investors should note that the stock is trading in the upper range 52-week range. This means tax loss selling should not have a large impact on the stock. The shares also sport a dividend. The current yield is 2.8%.
Bottom Line
I may sound like a broken record, but I think it bears repeating; this is retail, and although things seem to be somewhat upbeat today, that can change in a heartbeat. Buying stocks that trade under book or at a low multiple of book value is no guarantee of success. However, it can limit the downside potential, and if the masses eventually warm to the story, it could mean big upside.
For more on analyzing stocks using ratios, be sure to check out our Ratio Analysis Tutorial.
