Benjamin Graham, who is known by many as 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 a big upside if and when investors bid the stock higher. (Learn more on book value, in our article Digging Into Book Value.)
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Everyone Wants a Bargain
The problem is that buying stocks under book value isn't always easy. Savvy investors are already aware of this strategy, and so when such bargains arise, often they are 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. In fact, sometimes "cheap" stocks remain cheap, often 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 (P/B) of less than one which may be worthy of follow-up research.
Low Price-To-Book Value Companies
|
Company
|
Market Cap
|
P/B
|
P/E
|
Current Ratio
|
|
DryShips, Inc. (Nasdaq:DRYS)
|
$902 M
|
0.51
|
N/A
|
0.4
|
|
Excel Maritime Carriers (NYSE:EXM)
|
$317 M
|
0.25
|
8
|
0.52
|
|
Eagle Bulk Shipping, Inc. (Nasdaq:EGLE)
|
$226 M
|
0.44
|
3.5
|
0.83
|
|
Navios Maritime Holdings Inc. (NYSE:NM)
|
$440 M
|
0.51
|
4
|
1.88
|
|
Genco Shipping & Trading Ltd. (NYSE:GNK)
|
$687 M
|
0.87
|
12.5
|
6.67
|
|
OceanFreight, Inc. (Nasdaq:OCNF)
|
$121 M
|
0.20
|
0.65
|
0.35
|
|
Industry Ave.
|
|
0.67
|
4.4
|
|
|
Data as of market close June 24, 2009
|
Price-to-Book
Just looking at the price to book OceanFreight is the best on the list. The net book value per share from its most recent quarter sits at $6.35 and the share price hovering around $1.30 screams value. There is a little pressure on the ability to pay short-term liabilities as depicted by the tiny current ratio of about 0.35. Earnings per share over the last 12 months was $1.99 sticking a $0.65 price tag on every dollar of earnings.
Enter the board of directors requesting the ability to increase authorized common shares to one billion from the current 100 million. Authorized is different than issued but it should increase cash available to grow the business later this year, and obviously it will dilute shareholders.
Let's look at the assets: 13 ships including 1 Capesize, 8 Panamax, 1 Suezmax, and 3 Aframaxes. Just the 8 Panamaxes, at $20 million each are worth $160 million, and the market cap of the entire company currently sits around $120 million. In fact, they just sold a 1996 Panamax for $22 million and bought a 2001 Panamax for $25 million. Yes, they do have long-term debt, but given the low P/E of under one compared to the industry average of 4.4, this could be a good company to own when the market turns around.
Navios Maritime Holdings Inc. is also issuing additional mandatory convertible preferred equity to finance operations. It has agreed to buy four Capesize ships for a total cost of approximately $325 million, and will issue $165.22 million worth of stock. Its P/B is at a respectable 0.51 and the current ratio isn't looking too bad. When the market turns back around, the shippers that survive could see these assets put to use. But it might take a couple months for the value of these companies to return to patient shareholders.
The Bottom Line
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.)
