Potential exists in low ratios
By John Dorfman
Published: Tuesday, Nov. 12, 2013, 12:01 a.m.
For a dozen years, I've been bringing you an annual bouquet of stocks that sell for less than book value.
Last year's collection showed a total return of 49.1 percent from Nov. 13, 2012, through Nov. 8, 2013. The gain in the Standard & Poor's 500 Index for those same dates was 31.6 percent.
Book value is simply corporate net worth, a company's assets minus its liabilities. It is usually expressed per share of common stock outstanding.
Divide the stock price by book value and you have the price-to-book ratio. A ratio of 1.5 is low, and 1.0 or below is very low — and possibly a bargain.
My selections from a year ago generated the following returns (including dividends): Quad Graphics Inc. (QUAD), up 90.7 percent; MetLife Inc. (MET), up 63 percent; Allstate Corp. (ALL), up 45.1 percent; Royal Caribbean Cruises Ltd. (RCL), up 26.6 percent; and Loews Corp. (L), up 20.3 percent.
Of course, I don't expect to do that well every year. But the long-term track record is encouraging.
I've compiled a low price-to-book list annually from 1998 on, with a time-out from 2007 to 2009. So I've done 12 lists in all, not counting the one you're going to read today.
The average total return on these selections has been 17.7 percent, compared with 9.4 percent for the S&P 500.
My low price-to-book recommendations have beaten the S&P 500 seven times out of 12, and generated a profit eight times out of 12.
Bear in mind that these are paper recommendations, and don't reflect trading costs or taxes. Past performance doesn't indicate future results. And the performance of my column picks shouldn't be confused with real-money returns I earn for clients.
That said, here are five picks of stocks selling below book value. These stocks are, almost by definition, out of favor with investors. But I think they have good potential for gains over the next 12 months or more.
Reinsurance Group of America Inc.
Reinsurance Group of America Inc. (RGA) of Chesterfield, Mo., is subject, like all reinsurance companies, to the whims of hurricanes, floods, tornados and the like. As an insurer's insurer, a reinsurance company is bound to have considerable earnings fluctuation from year to year.
However, at today's valuations, I feel the risk-reward ratio looks good at RGA. The stock sells for 0.7 times book value, 0.5 times revenue and nine times earnings. These are multiples that make a bargain hunter's mouth water.
Petrobras Argentina SA
Speculative but interesting is Petrobras Argentina SA (PZE), an Argentine oil company traded in the United States as an American Depositary Receipt. The risks are high, including the risk of another Argentine default on its sovereign debt, which could disrupt the already shaky business climate there.
But on the plus side, Petrobras Argentina has a decent balance sheet, good prospects for new fields, and dirt-cheap valuations: 0.6 times book value, 0.4 times revenue, and nine times earnings.
OmniVision Technologies Inc. (OVTI), based in Santa Clara, Calif., makes imaging chips used in mobile-phone cameras and other applications. It showed eye-popping growth in sales and earnings a few years ago. Growth has now slowed to respectable.
I think OmniVision is likely to surprise analysts on the upside, and I find its valuations – 0.9 times book value, 0.5 times revenue and 12 times earnings — attractive.
Fresh Del Monte Produce Inc.
Fresh Del Monte Produce Inc., with headquarters in Grand Cayman, Cayman Islands, sells fresh bananas, pineapples and other produce. It may benefit from a trend toward healthier eating, though there is always more talk than action on that score.
I've owned the stock in the past. It often appears cheap, and seems so now, at 0.8 times book, 0.4 times revenue and 14 times earnings. The risk is that it may be permanently cheap. On balance, I think it's a good choice in a bull market that is now four-and-a-half years old.
Lastly, I recommend Stealth Gas Inc. (GASS), a Greek shipping company that specializes in transporting liquefied natural gas (LNG). The Greek economy is a shambles, but the tanker market in general, and the LNG market in particular, are worldwide markets.
Nine analysts follow Stealth Gas, and all nine recommend it, five of them strongly. That's not necessarily a plus in my book, because I prefer stocks that are more undiscovered.
However, it's some comfort when we're dealing with a small-capitalization ($348 million) stock in an economically unstable country. It's also nice to know that the analysts foresee a jump in earnings from about 80 cents a share this year to perhaps $1.27 next year. And of course, 0.7 times book value is a mighty pleasing multiple.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at firstname.lastname@example.org.
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