Big-name companies priced below book value
By John Dorfman
Published: Tuesday, Nov. 13, 2012, 12:01 a.m.
Today, about 10 percent of all U.S. stocks sell for less than book value, or corporate net worth per share.
The fleet of companies selling “below book” includes such well-known corporations as MetLife Inc., Allstate Corp., Hess Corp., Corning Inc., Loews Corp. and Xerox Corp.
Book value, also known as shareholders' equity, is the value of a company's assets minus the value of its liabilities.
You might think that no company would ever sell for less than book, because the company could be liquidated and the proceeds could be distributed to shareholders. Liquidation, however, may be unlikely — and usually is opposed by management.
Moreover, investors may reason that a company's problems are worsening, so that the book value will dwindle before the value can ever be realized. Or, skeptics may believe that a company's assets are overstated, or its liabilities understated.
Because stocks selling below book value represent an extreme of negative investor sentiment, buying them can prove profitable.
Since 1998, I have written 11 columns recommending stocks selling below book. The average gain for the 11 lists has been 14.9 percent, compared to 7.4 percent for the Standard & Poor's 500 Index, measured on a 12-month total-return basis.
Seven of the 11 lists have been profitable, and six of the 11 have beaten the S&P 500.
Bear in mind that past performance doesn't guarantee future results. These are paper portfolios with no allowance for trading costs or taxes. The performance of my column recommendations shouldn't be confused with those for any real-money portfolios I run.
My latest list, published on April 24, 2011, didn't fare well. It suffered a 3.7 percent loss, while the S&P 500 gained 4.8 percent. Most of the blame goes to a 28 percent loss in OMG Group Inc., which produces cobalt powder among other things.
Buying stocks that sell for less than book value was one of the favorite techniques of Ben Graham, the hedge fund manager and Columbia University professor often considered the father of value investing. In Graham's day, such stocks were fairly common.
In the ebullient markets of the 1980s and '90s, such bargains became rare. Today, we are not back in Graham territory, but investors are gloomy enough to create some opportunities, in my view.
Here are five stocks selling below book value that I like.
• MetLife (MET), the largest U.S. life insurer, has a book value of $58 a share. Excluding intangibles and goodwill it's $48 — still way above the stock price, which is $32.
MetLife also looks like a bargain based on its earnings per share. This year, analysts expect per-share earnings of more than $4. Last year it was more than $5, and analysts expect to see figures above $5 in 2013 and 2014. That means the stock is selling for at most eight times earnings, perhaps as little as six times earnings.
• Allstate (ALL), one of the largest car and home insurers, sells for 0.9 times book value. Yet the company is consistently profitable. In the past 20 years, its only loss years were 1992 and 2008.
Many insurers depend on investment income (investing the reserves that eventually will be used to pay claims) to make a profit. Allstate needed investment income last year to stay in the black, but it frequently makes a profit on its basic insurance business.
• Loews Corp. (L) is a New York-based conglomerate run by the Tisch family. In the past decade it has returned more than 200 percent for shareholders (including dividends), more than double the return on the S&P 500 Index. Yet most of that time it was selling for book value or less.
Loews was in the cigarette business until 2008, and investors were leery of potential legal liability in tobacco cases. Also, investors don't like conglomerates because they are hard to analyze. But at 14 times earnings and 0.82 times book value, Loews looks like a bargain to me.
• Royal Caribbean Cruises Ltd. (RCL) of Miami is the world's second-largest cruise ship line. It sells for 0.86 times book value, as economies around the world struggle for growth. But the world is a cyclical place. When better times come, I expect the stock to make substantial gains.
• More speculative is Quad Graphics Inc. (QUAD), a commercial printer with headquarters in Sussex, Wisc. After posting substantial losses the past two years, it seems headed for a profit of close to $2 a share this year. The dividend yield, at 6 percent, is probably its most attractive feature.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at email@example.com.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.