The Magic Formula's Top 20 Price/Book Ratio Stocks

The next value metric we will add to the current Magic Formula list is the price-to-book ratio. Previously, we've covered Magic Formula stocks with the:

• Highest Dividend Yields
• Strongest Relative Strength
• Lowest Price-to-Sales Ratio

Price-to-book is one of the oldest and most intuitive value investing statistics. The "bible" of value investing, Benjamin Graham's The Intelligent Investor, uses the price-to-book ratio as the main criteria for finding undervalued stocks. Book value is the same thing as net worth: all of a company's assets, minus its liabilities. The net worth is (ideally) what the company's value is when not adding a premium for things like future earnings power. Therefore, a company whose market value is below book value would seem to be an obvious bargain.

Through this series of articles we've also been using James O'Shaughnessy's study of mechanical investing strategies over 50 years, detailed in his book What Works on Wall Street. Buying stocks with low price-to-book ratio as the only criteria performed very well over the 50 year study period, behind only the price-to-sales ratio:

Stocks with Lowest:Annual Return

Price-to-Sales	15.4%
Price-to-Book	14.4%
Price-to-Earnings	11.2%

Of course, there are a few things to be aware of when buying stocks selling below book value. For one, the book value will be calculated with accounting assumptions made for certain assets such as the worth of intangibles like brand names, patents, exclusivity contracts, and so forth. Also, for many companies the purchase price of acquisitions over the acquired company's book value (known as "goodwill") will be a major portion of assets on the balance sheet, even though it is not an asset that can be bought and sold. Some investors prefer to subtract intangibles and goodwill out from the total assets to get what is known as a "tangible book value." However, not all of the book values used in the list below do this.

So, with no further ado, here are the 20 Magic Formula stocks with lowest price-to-book ratio:

TickerCompanyPrice-to-Book Ratio

TKTM	Ticketmaster	0.18
CITP	COMSYS IT Partners	0.31
IBAS	iBasis	0.32
KNXA	Kenexa	0.43
ISIL	Intersil	0.43
MTW	Manitowoc	0.55
TSCM	TheStreet.com	0.59
GTLS	Chart Industries	0.59
PCR	Perini Corp	0.66
NOV	National Oilwell Varco	0.67
ELOS	Syneron Medical	0.72
NOC	Northrup Grumman	0.73
NWS	News Corp	0.74
CYNO	Cynosure	0.76
SHFK.PK	Schuff International	0.80
DIVX	DivX	0.82
KG	King Pharmaceuticals	0.83
OPTV	Open TV	0.84
HURC	Hurco Companies	0.84
GPX	GP Strategies	0.84

All 20 of these stocks sell below their stated net worth. Two of them are MagicDiligence Top Buys and a few others were given favorable reviews. As always, more research is required before trusting these ratios. For example, the top stock here, Ticketmaster (TKTM), has 63% of its total assets in goodwill and intangibles. Subtracting these out leaves a tangible price-to-book ratio of close to 1.0 - still pretty cheap but not nearly as impressive as 0.18. On the other hand, Hurco (HURC) has less than 3% of assets in intangibles and goodwill, making its valuation well below what the company is worth on a net asset basis, and probably worth a good look by value investors.

For the next and final article in this mini-series, we'll put all of the add-on metrics together, and create a list of Magic Formula stocks that rank highly when scored on each additional screen. Since Magic Formula stocks are cheap and high quality by design, this cumulative screen should help identify some of the very best MFI opportunities on a quantitative basis.

Disclosure: Steve owns NWS.

Comments

[Richard Col...:]

This is one of the best articles I have read for sometime.

We need more positive articles such a this instead of repeating the same old thing everyday that we are in a recession and everyone is losing their job. No analyst bothers to mention how many new jobs are created.

With this kind of information people will start to come back into the market. Keep up the good work Steve.

Dan Kowkabany

2008 Dec 09 11:11 AM

[dsrtwriter:]

I agree. Nice, straightforward and educational.I missed the previous articles you refer to so will go to your web site.

2008 Dec 09 03:39 PM

[Tim Meador:]

I've enjoyed your well reasoned insight on seeking alpha for sometime. Keep up the good work.

2008 Dec 09 05:23 PM

[Kenneth J. ...:]

Cocerning TSCM...

For years, TheStreet's proprietary index was part of the daily analysis among other indices including the Gold & Silver ($XAU), Bank ($BKX), Broker/Dealer ($XBD), Networking ($NWX), Semiconductor ($SOX), Integrated Oil ($XOI), Biotech ($BTK), Healthcare ($HMO), Retail ($RLX), Oil Services ($OSX). It seems somewhat ironic that they would cease calculation of an index that had allowed investors to guage the performance of the very industry which that Internet - Content company resides. They must have had some good reasons for that decision.

Rebecca Updegraph, their IR contact at thestreet.com, said the index "wasn't being utilized" and she will get back to me with more information soon. Not being utilized, huh? There was suddenly a hole in my routine reports, and when I look at sites like Yahoo Finance to see the indices' data they provide, guess what? I still see the ^DOT
finance.yahoo.com/indi... being utilized, although this is only because few seem to have noticed its abandonment.

Few headlines ever come up on any of the indexes, NONE ON THIS INDEX, IN FACT (finance.yahoo.com/q?s=... ) SO INVESTORS ARE LOST IF/WHEN they go looking! Doesn't anyone feel they have a fiduciary responsibility to help the lost investors?

I literally had to spend a fair amount of time to get this "story" while nobody else on the planet (other than an easy-to-miss announcement from Nasdaq OMX) bothered to even issue a press release on it.

CANSLIM.net, in keeping with its objective of providing superior fundamental and technical reports concerning stocks, industry groups, and the major averages most relevant for investors, has begun tracking the AMEX INTERACTIVE WEEK INTERNET Index ($IIX OR ^IIX) which is comprised of 40 stocks. This index will be analyzed in place of the recently abandoned TheStreet.com Internet Sector Index ($DOT) which contained 23-stocks.

The "Industry Group Watch" section of the CANSLIM.net After Market Update provides daily analysis on the performance of leading and lagging industry groups. It is part of a membership which includes ongoing reports designed to keep investors informed. We think that this change makes the most sense under the circumstances. I do not believe it was a component of its own proprietary index, at least not recently, but we are nonetheless intrigued as to why the folks at TheStreet.com (NASDAQ: TSCM) decided that 2009 was the year that it would quit supporting their proprietary index which began on September 30, 1998.

Further on this point, the decision to abandon their proprietary index reveals several reasons for any current TSCM shareholder to be concerned. The action may be revealing that the company's directors are under-estimating its assets, neglecting them, failing to extract sufficient value form them, and/or having trouble exploiting any apparent advantages the company may still have.

Jan 09 11:37 AM