Over the course of the past year, I have tried to highlight many different stocks as potential investments. Keep in mind, I am simply publishing the daily ideas that are involved in my own research process and these articles should certainly not be taken as investment advice.
The reason I have chosen to write about stocks is to take the guesswork out of investing for my own decision making process, as well as being able to focus on "sitting tight" and being on the right side of the markets over time and helping others do the same. By going back and seeing what worked and what didn't, I hope to become a better investor.
Most of the time, the direction of the market is up -- stocks tend to rise over the long term, but the corrections are the events that separate great investors from mere mortals (like me). Part of my own strategy is not to try to time the markets as much as trying to prepare for a change in the overall trend of the tape. Earning money on the short side is a great tool for hedging market risk in bear markets and allows investors to buy cheap stocks at even cheaper prices using profits from the short side to buy cheap names at the lows. As Livermore said, trying to catch the last 1/8 of a rally or the last 1/8 of a bear market short is a fool's game.
As a devoted value guy, I have a personal bend toward companies that are cheap on a book value and free cash flow basis because that's what works over long periods of time. While investing in the cheapest stocks in the market has been shown to be a market beating, profitable approach according to Fama and French, many investors have argued that this more profitable approach means investors take on more risk. Personally, I agree with Fama and French that the opposite is true and that over time, low price to book value names (and low P/E names generally) will outperform the index funds.
The evidence generated by Fama and French and the track record of Buffett's early partnership and of Ben Graham tend to support the thesis that stocks with low price to book value ratios outperform investments in stocks with higher price to book value in absolute, risk adjusted terms. In fact, according to a study that Fama and French conducted, investing in the lowest price to book value stocks listed on the NYSE, AMEX, and NASDAQ from 1960 to 1990 yielded a return of 21.4% versus an annual return of 8% for all other stocks.
Further evidence of the outperformance of low price to book stocks was given by David Dremin. In his Forbes 5/6/96 column titled "Ben Graham was right--again," Dremin discussed his study of the largest 1500 stocks on Compustat for the 25 years ended 1994. He found that the 20% lowest P/B stocks (quarterly adjustments) significantly outperformed the market which outperformed the 20% highest P/B stocks. Furthermore, Fama and French found that low price to book value stocks were actually less volatile and carried a lower "Beta" than the rest of the market, which is helpfull as a money management tool in that a long short book can actually make money in bear markets provided you get the timing correct on your market hedge.
While the studies and the literature would suggest that low price to book value investing is a much better approach than investing in index funds, over the short run I have found personally that results can be quite volatile if wide diversification is not undertaken -- but this was more of an issue of logistics for me. Lesson to be learned: when a seed investor commits to invest X amount of capital in your low price to book hedge fund, spread it evenly over 30 names. Low price to book stocks are usually illiquid and once you buy them you have to sell very carefully so as not to create a liquidity run on the stock in question, forcing you to sell at ridiculously cheap prices in microcap value names.
In other words, over the years, I have also discovered that Ben Graham was right about something else: investing in low price to book stocks works better with a diversified approach. Investors should also realize that micro cap value stocks often carry risks that large cap stocks do not -- corporate governance issues largely go unchecked because small caps tend to fly under the radar screen of the regulatory bodies and the activist investors who keep managements in check in the low price to book value arena. Here are 20 low price to book value stocks that I am either invested in or am keeping an eye on to add on sell offs or to my growing collection of stocks trading below book.
GBR - New Concept Energy is trading for less than $6MM in market cap, yet the company has over $18MM in net tangible assets consisting mainly of natural gas wells, a senior assisted living community, and a loan to a real estate private equity firm. Shares could double from current prices and still be under 70% of tangible book value.
AWX - Avalon Holdings is trading for less than $11MM in market cap, yet the company has over $38MM in net tangible assets. The assets are golf courses and country clubs in Ohio which are top of the line, and at one time, PGA level quality. Avalon also has a waste management business and is mildly cash flow positive.
HAST - Hastings Entertainment is a retailer that sells 10-15% of its product used, sells another 10% in video games and consoles, rents movies for $.49 cents per day (lower prices than Redbox and wider selection), electronics, has a coffee shop, a comics department, and trades for less than 40% of tangible book value. The company is trading for, get this, less than 4X free cash flow.
NWLI - National Western Life is trading for $156 per share, yet the company boasts a net tangible book value of over $350 per share. NWLI also trades for under 9X earnings and the company has been in business since the 1970's at least. High insider ownership along with conservative investment discipline make this illiquid small cap a cheap stock to own for the long term.
VOXX - Audiovoxx was a true Net Net stock (the price of the stock is less than current assets minus total liabilities) until the recent acquisition of Klipsch. The company is still cheap and trading for less than half of book value and around 14X reported earnings.
USU - USEC is trading for under 40% of book value likely because of the Fukushima nuclear disaster. The company owns and operates nuclear plants and is working on a major development in Pinkerton, Ohio. USU is a cheap stock but the worries about nuclear fuel will be a headwind going forward. (Keep in mind, below book value stocks always have some type of headwinds.)
GNK - Speaking of cheap, Genco Shipping is insanely cheap at 25% of tangible book and at two times trailing earnings. The company has been massively crushed recently, down 50% from the "highs" of 50% of book value last summer. At this price, you would have to be nuts to short the stock, and the company could see an uptick in business if the dry bulk market starts to pick up.
EXM - Like Genco, Excel Maritime is dirt cheap on assets and earnings, trading for an incredible 19% of tangible book value and 1.5X trailing earnings. EXM is like Genco in that the company would likely make investors a small fortune if the dry bulk market picks up anytime in the near future. The risks of overcapacity appear overdone to me.
TAIT - Taitron Components is trading for less than half of tangible book value and is a classic Net Net stock. The company is slowly turning the work and may show a profit in the near future. Even if it never earns a cent, Stuart Wang, CEO, could run off the existing balance sheet and give investors a near 200% return on their investments.
VII - Vicon Industries is trading for 64% of book value and is reporting small losses. The company could reward longer term holders as the shares revert to a reasonable valuation on tangible net assets. Vicon just barely makes Net Net status on current assets minus total liabilities.
HWG - Another Net Net, Hallwood Group is actually becoming quite attractive to me as it is earning money YOY although it posted losses in the most recent quarter. HWG trades for a little over half book and for under 4X trailing earnings.
BAMM - Books A Million is trading for around 60% of book value and under 8X trailing earnings. Like Hastings, the company could likely liquidate at a profit, but management is trying to turn the business around. BAMM has historically been a very shareholder friendly, profitable business and has a history of paying out large dividends to its shareholders.
AHL - Aspen Insurance Holdings is trading for 65% of tangible book value and for around 18X earnings. The Japan disaster has cost a pretty penny, but AHL is conservative and historically quite profitable. AHL's forward P/E is under 9X.
PLFE - Presidential Life is cheap at 46% of book value and under 15X earnings. Value investing via low price to book value is very out of favor at the moment, but as the markets look expensive currently, investors will likely return to the bargain stocks again in the near future.
OTCPK:TBAC - Tandy Brands is a company I engaged in a proxy battle with back in 2008. Although the company has lost a good deal of money in recent years, the shares are still in Net Net territory and trade for just over 50% of tangible book. The company and I have had our differences, but I am starting to like the products they make more and more with their renewed focus on quality and design. CEO Rod McGeachy has his reputation on the line here, and rest assured, I will be following this stock closely for my readers.
BAC - Bank of America is trading for a small discount to tangible book value, but is a 5% or so holding of the Fairholme Fund. FAIRX has outperformed the stock market by a wide margin over the past decade.
AIG - American International Group is now trading for a very wide discount to tangible book value, and as the company turns the ship around, shares could double and still only trade for a small premium to tangible book. This is Fairholme's largest stock position and insiders continue to buy stock on the open market. AIG trades for 59% of tangible book value.
KCLI - Kansas City Life is a holding of ABC Funds run by Irwin Michael (who should have voted for me in the TBAC proxy) and is trading for 51% of book value and under 16X trailing earnings. The company pays out a 3.6% dividend which should help you with the extreme boredom that often comes from investing in the below book space (lower beta and zero interest from most mutual funds who are too busy pumping AMZN).
BQI - Oilsands Quest is trading for just 37% of book value and has some of the largest deposits of oil and gas in the world in its reserves. BQI has been a disappointment for its shareholders, but the stock is now too cheap to ignore.
KEP - Korea Electric Power is trading for 42% of book and for an EV/EBITDA of around 6. The stock also trades for under 14X earnings and is a larger cap name. Investors can sell call options against the stock or sell puts to lower risk and add margin of safety.
AOI - Alliance One International is a cheap tobacco play that is owned by Seth Klarmin, trading for around 80% of tangible book. The company has deleveraged the balance sheet in recent quarters and trades for under 8X trailing earnings.
MEAD - Mead has been a disappointment for long term investors, but the stock is cheap at 37% of book value. At some point, one has to wonder why a company like this does not just liquidate, give their shareholders a 200% return, and call it a day.
ZLC - Zales is a mess right now, but the company's results have been slowly improving. At 44% of book value, ZLC looks pretty undervalued though losses in the past make this a riskier play than many others on this list.
JBSS - John B. San Filippo is looking undervalued again after investors have seen a roller coaster ride of a stock price in the past few years. JBSS is trading for 50% of book and for under 15X earnings.
NTT - Nippon Telegraph and Telephone is likely not winning any points with investors based on the company name. The stock price, however, should make investors want to purchase the stock via selling long dated put options because the company is trading for just 9X earnings and 61% of book value.
DRYS - Dryships is a another cheap shipper at 7.46X earnings and 50% of book value. I do, however, like EXM and GNK better at current levels, although DRYS has diversified into deep sea oil rigs, which should help margins at some point if the dry bulk index does not pick up in the near term.
DPTR - Like BQI, Delta Petroleum is a cheap play on hard to reach oil shale, heavy crude, etc. The company has been a big loser for Kirk Kerkorian, though the price to book value of just .42X could make investors who buy at current levels a ton of money if the company reverts to a price that reflects tangible book.
GNW - Genworth Financial is trading for 41% of book, although the company has many mortgage backed assets on its books which is likely "the reason" for the big discount. At a forward P/E of under 7X, this discount may be unwarranted and value investors could make good money buying at current prices if Fama and French are still right about low P/B value stocks.
FMD - First Marblehead is like GNW in that it owns many mortgage based securities and was absolutely pummeled in the mortgage collapse of 2008. If they can gradually liquidate their mortgage portfolio and return cash to shareholders, FMD could provide investors with a nice long term gain, though I am not all that optimistic on this one myself. FMD trades for 63% of book value.
So there you have it - a list of solid bargain basement below book names that only a billionaire hedge fund manager and Fama and French could love.