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The Price/Book Value Ratio is an interesting valuation metric that is often used when investors are looking for arbitrage investment opportunities. To them, this ratio is their bread and butter in terms of looking for potential opportunities. Warren Buffet,who is best known for his value investing strategy, has used this metric in the past to make legendary investments in companies such as American Express (AXP) and PetroChina (PTR).

The P/BV ratio measures the firm’s book value against its stock's market value. A low ratio number could mean that the company is undervalued or that something is fundamentally wrong with it. If the P/BV Ratio is below 1, this indicates that the firm's "break up value" may exceed its current market value.

We ran a screen for companies that have outperformed the S&P 500 this year (YTD Return) and that have a P/BV Ratio of less than 1. From this narrowed pool, we then screened for firms that have generated solid earnings from the firm’s assets (Operating Margin>10%).

The list is ranked from highest to lowest by P/BV Ratio.

1. PNM Resources Inc (PNM)

Sector

Utilities

Industry

Utilities - Regulated Electric

Market Cap

$1244M

Beta

0.78

Analyst Sentiment

9/11-List Hold/Neutral (Neutral)

The company operates in energy businesses in the US. PNM’s YTD Return is 13.1%. The firm’s Price/BV Ratio is 0.8. The firm’s Operating Margin is 14.31%. The short interest for the firm is 4% as of 8/15/2011.

2. NRG Energy Inc (NRG)

Sector

UtilitiesUtilities

Industry

Utilities - Independent Power Producers

Market Cap

$5158M

Beta

0.76

Analyst Sentiment

9/14-List Buy/Outperform (Bullish)

The company generates wholesale power. The firm’s YTD Return is 9.42%. NRG’s Price/BV Ratio is 0.63. The firm’s Operating Margin is 14.78%. The short interest for the firm is 4.10% as of 8/15/2011.

3. Aircastle Ltd (AYR)

Sector

Industrials

Industry

Rental & Leasing Services

Market Cap

$802M

Beta

2.24

Analyst Sentiment

5/8-List Buy/Outperform (Bullish)

The company acquires and leases commercial aircraft to passenger and cargo airlines. The firm’s YTD Return is 4.55%. AYR’s Price/BV Ratio is 0.59. The firm’s Operating Margin is 12.55%. The short interest for the firm is 5.70% as of 8/15/2011.

4. Ameren Corp (AEE)

Sector

UtilitiesUtilities

Industry

Utilities - Diversified

Market Cap

$6863M

Beta

0.59

Analyst Sentiment

8/10-List Hold/Neutral (Neutral)

The company operates a public utility company within Missouri and Illinois, USA. The firm’s YTD Return is 3.48%. AEE’s Price/BV Ratio is 0.88. The firm’s Operating Margin % is 11.99. The short interest for the firm is 2% as of 8/15/2011.

5. Nippon Telegraph and Telephone (NTT)

Sector

Communication Services

Industry

Telecom Services

Market Cap

$68551M

Beta

0.36

Analyst Sentiment

12/18-List Buy/Outperform (Bullish)

The company provides offers telecommunications services in Japan. The firm’s YTD Return is 3.14%. NTT’s Price/BV Ratio is 0.64. The firm’s Operating Margin is 11.79%. The short interest for the firm is N/A as of 8/15/2011.

6. Vodafone Group PLC (VOD)

Sector

Communication Services

Industry

Telecom Services

Market Cap

$133388M

Beta

0.7

Analyst Sentiment

N/A

The company offers mobile communications throughout the world. The firm’s YTD Return is 2.84%. VOD’s Price/BV Ratio is 0.92. The firm’s Operating Margin is 12.2%. The short interest for the firm is N/A as of 8/15/2011.

7. American Capital Ltd (ACAS)

Sector

Financial Services

Industry

Asset Management

Market Cap

$2742M

Beta

2.53

Analyst Sentiment

7/11-List Hold/Neutral (Neutral)

This is a venture capital & private equity firm. The firm’s YTD Return is 2.51%. ACAS’s Price/BV Ratio is 0.6. ACAS’s Operating Margin is 34%. The short interest for the firm is 1% as of 8/15/2011.

8. Seaspan Corporation (SSW)

Sector

Industrials

Industry

Shipping & Ports

Market Cap

843

Beta

1.17

Analyst Sentiment

5/8-List Buy/Outperform (Bullish)

The company operates container ships. The firm’s YTD Return is 2.42%. The firm’s Price/BV Ratio is 0.63%. SSW’s Operating Margin is 46.62%. The short interest for the firm is 4% as of 8/15/2011.

9. Hornbeck Offshore Services (HOS)

Sector

EnergyEnergy

Industry

Oil & Gas Equipment & Services

Market Cap$

568M

Beta

2.14

Analyst Sentiment

6/11-List Hold/Neutral (Neutral)

The company operates offshore multi-purpose support vessels, supply vessels (OSVs), and a shore logistics support. The firm’s YTD Return is 1.15%. HOS’s Price/BV Ratio is 0.69. The firm’s Operating Margin is 26.67%. The short interest for the firm is 15% as of 8/15/2011.

10. Healthways, Inc. (HWAY)

Sector

Healthcare

Industry

Medical Care

Market Cap

$380M

Beta

1.54

Analyst Sentiment

7/11-List Hold/Neutral (Neutral)

The company offers full-service solutions that help people relative to improving their health. The firm’s YTD Return is 0.99%. HWAY’s Price/BV Ratio is 0.86. The firm’s Operating Margin is 12.6%. The short interest for the firm is 7.90% as of 8/15/2011.
We hope this list helps investors as they do their own due diligence on companies that appear undervalued relative to their P/BV Ratio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 10 Cheap Stocks Outperforming The Market With Strong Profitability