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Big-name companies priced below book value

| 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 jdorfman@thunderstormcapital.com.

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