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The Case for Value Investing

Academic studies have shown in multiple time frames, in multiple markets, that there is a value effect. Stocks that sell at the deepest discounts to accounting values of their equity have enjoyed higher returns than stocks that sell at the highest premiums to their equity values. On the basis of overwhelming empirical evidence, the price to book ratio is a useful starting point for value investing.

The Risks of Value Investing

However, these stocks suffer incredible risks. Many of these stocks are on the verge of bankruptcy, have lagged financial statements which do not accurately portray current equity values, or cannot be rationally valued on the basis of reported financial statements. Since the price-to-book ratio has been connected to long-term returns, is there a long-term measure of risk we can use? Fortunately, there are methods that can help distinguish value investments from value traps.

One predictive measure of bankruptcy for non-financial companies is the Altman Z-Score. This score places companies into three groups: “safe” (Z-score > 2.99), “grey” (Z-score between 2.99 and 1.81), and “distressed*” (Z-score < 1.81), and is surprisingly useful for identifying bankruptcy risk in the coming year. This method of segmenting companies uses of fundamental (financial statement) data and market capitalization only.** Beyond credit risk prediction, companies with higher Z-scores have been shown to outperform companies with lower Z-scores, in aggregate.

Assessing Value and Risk

The Altman Z-score was recently calculated for hundreds of companies with price to book ratios of 0.9 or lower. Low P/B multiple companies which scored in the “safe” and zone are presented below:

Ticker

Company

Altman Z-score

P/B

P/E

(DUCK)

Duckwall-ALCO Stores Inc.

3.04

0.29

22.34

(CRV)

Coast Distribution System Inc.

3.81

0.33

N/A

(GIGA)

Giga-tronics Inc.

3.57

0.34

N/A

(GTSI)

GTSI Corp.

3.26

0.4

N/A

(TFCO)

Tufco Technologies Inc.

3.02

0.4

N/A

(CUO)

Continental Materials Corp.

3.37

0.41

N/A

(EDS)

Exceed Company Ltd.

4.46

0.41

2.06

(TA)

TravelCenters of America LLC

7.37

0.42

N/A

(JBSS)

John B Sanfilippo & Son Inc.

3.00

0.43

19.26

(OTCPK:KRSL)

Kreisler Manufacturing Corp.

4.98

0.45

6.25

(UPG)

Universal Power Group Inc.

3.77

0.47

7.93

(TIII)

Tii Network Technologies, Inc.

3.43

0.48

6.5

(KGJI)

Kingold Jewelry, Inc.

13.65

0.49

2

(TWMC)

Trans World Entertainment

3.36

0.49

N/A

(UUU)

Universal Security Instruments

7.01

0.49

N/A

(BPHXD)

BluePhoenix Solutions Ltd.

4.67

0.51

N/A

(UFI)

Unifi Inc.

3.64

0.51

9.6

(HRT)

Arrhythmia Research Technology

4.10

0.55

N/A

(KBALB)

Kimball International, Inc.

3.97

0.55

50

(OTCQB:NOBH)

Nobility Homes Inc.

10.19

0.55

N/A

(SKY)

Skyline Corp.

4.33

0.55

N/A

(BSET)

Bassett Furniture Industries Inc.

4.04

0.56

1.61

(INSM)

Insmed Incorporated

9.41

0.56

N/A

(SED)

SED International Holdings, Inc.

4.13

0.57

8.17

(WZE)

Wizzard Software Corporation

6.75

0.57

N/A

(TUES)

Tuesday Morning Corp.

3.45

0.58

22.87

(CNTY)

Century Casinos Inc.

3.02

0.59

19.79

(ANCI)

American Caresource Holdings

3.60

0.6

N/A

(AEY)

ADDvantage Technologies Group

3.77

0.61

8.54

(CBK)

Christopher & Banks Corporation

3.23

0.61

N/A

(CSPI)

CSP Inc.

3.52

0.61

23.71

(RCKY)

Rocky Brands, Inc.

3.06

0.61

6.25

(CECO)

Career Education Corp.

3.04

0.62

3.79

(PTIX)

Performance Technologies Inc.

3.31

0.62

N/A

(SCX)

LS Starrett Co.

3.35

0.62

10.76

(WINN)

Winn-Dixie Stores Inc.

4.37

0.62

N/A

(LEDS)

SemiLEDs Corporation

3.09

0.63

N/A

(SKX)

Skechers USA Inc.

3.61

0.63

N/A

(CTRN)

Citi Trends

3.79

0.64

27.03

(ELY)

Callaway Golf Co.

3.03

0.64

N/A

(OTCPK:MYRX)

Myrexis, Inc.

12.26

0.64

N/A

(TSRI)

TSR Inc.

6.10

0.64

37

(GENC)

Gencor Industries Inc.

9.62

0.65

337.5

(RWC)

RELM Wireless Corp.

3.08

0.65

N/A

(GPRE)

Green Plains Renewable Energy

3.12

0.66

8.94

(LAKE)

Lakeland Industries Inc.

3.20

0.66

16.02

(MALL)

PC Mall Inc.

4.77

0.67

10.25

(AM-OLD)

American Greetings Corp.

3.19

0.68

6.52

(VLO)

Valero Energy Corporation

3.95

0.68

5.21

(AOSL)

Alpha & Omega Semiconductor

3.05

0.69

5.97

(FORM)

FormFactor Inc.

3.31

0.69

N/A

(HLYS)

Heelys, Inc.

6.60

0.69

N/A

(ASYS)

Amtech Systems Inc.

3.16

0.72

3.77

(BDL)

Flanigan's Enterprises Inc.

3.22

0.72

7.15

(CAS)

AM Castle & Co.

3.04

0.72

27.62

(LGL)

The LGL Group, Inc.

3.34

0.72

3.38

(OME)

Omega Protein Corp.

3.07

0.72

3.49

(BG)

Bunge Limited

3.46

0.73

9.24

(FLXS)

Flexsteel Industries Inc.

5.70

0.73

9.42

(FORD)

Forward Industries Inc.

4.03

0.73

N/A

(LINC)

Lincoln Educational Services

3.52

0.73

4.95

(KEQU)

Kewaunee Scientific Corp.

3.29

0.74

97.22

(ORN)

Orion Marine Group, Inc

4.05

0.74

N/A

(BHE)

Benchmark Electronics Inc.

4.19

0.75

12.75

(PRCP)

Perceptron, Inc.

3.38

0.75

51

(PSEM)

Pericom Semiconductor Corp.

3.66

0.76

44.12

(AIRT)

Air T Inc.

6.01

0.77

9.95

(CVR)

Chicago Rivet & Machine Co.

6.74

0.77

15.86

(STLY)

Stanley Furniture Co. Inc.

3.07

0.77

N/A

(PDEX)

Pro-Dex Inc.

3.69

0.78

3.08

(STRT)

Strattec Security Corp.

4.56

0.78

12.59

(CRAI)

CRA International Inc.

3.48

0.79

N/A

(FRS)

Frisch's Restaurants Inc.

3.15

0.79

22.47

(MSN)

Emerson Radio Corp.

4.54

0.79

4.09

(QBAK)

Qualstar Corp.

5.75

0.79

N/A

(REX)

REX American Resources

3.69

0.79

29.08

(AFAM)

Almost Family Inc.

4.92

0.8

7.13

(ARCW)

ARC Wireless Solutions Inc.

13.54

0.8

N/A

(ANTP)

Phazar Corp.

6.17

0.82

48

(BWS)

Brown Shoe Co. Inc.

3.08

0.83

18.42

(KTCC)

Key Tronic Corp.

3.72

0.83

10.42

(MEA)

Metalico Inc.

3.19

0.83

7.58

(WLDN)

Willdan Group, Inc.

3.00

0.83

10.28

(ANGO)

AngioDynamics Inc.

8.00

0.84

44.13

(FDP)

Fresh Del Monte Produce Inc.

3.73

0.84

15.72

(MPAC)

MOD-PAC Corp.

6.28

0.84

13.56

(TSO)

Tesoro Corporation

4.18

0.84

4.91

(APT)

Alpha Pro Tech Ltd.

13.68

0.85

46

(IM)

Ingram Micro Inc.

5.48

0.85

11.64

(KELYA)

Kelly Services, Inc.

5.15

0.85

10.31

(PTRY)

Pantry Inc.

4.52

0.85

27.67

(RIMG)

Rimage Corp.

5.64

0.85

16.44

(TLAB)

Tellabs Inc.

3.10

0.85

N/A

(LUB)

Luby's Inc.

3.70

0.86

26.42

(ORBC)

ORBCOMM, Inc.

4.79

0.86

N/A

(TQNT)

TriQuint Semiconductor, Inc.

5.55

0.86

9.62

(WSTL)

Westell Technologies Inc.

4.85

0.86

1.9

(ENG)

ENGlobal Corp.

3.91

0.88

N/A

(EPAX)

Ambassadors Group Inc.

4.36

0.88

16.54

(NAFC)

Nash Finch Co.

5.60

0.88

8.5

(OVTI)

OmniVision Technologies Inc.

3.57

0.88

5.29

(DIT)

AMCON Distributing Co.

11.54

0.89

6.43

(SVT)

Servotronics Inc.

4.56

0.89

7.38

(BKR)

Michael Baker Corporation

3.77

0.9

15.45

(FEIM)

Frequency Electronics Inc.

4.16

0.9

9.31

(NCIT)

NCI, Inc.

3.91

0.9

7.53

(SFE)

Safeguard Scientifics, Inc.

4.20

0.9

2.15

(XPO)

XPO Logistics, Inc.

4.99

0.9

N/A

Since there is only the faintest relationship between Altman Z-score and P/B ratio among very low price to book ratio stocks, the Altman Z-score might be able to inform the attractiveness of value investments for potential bankruptcies.

Research and soul searching is required before investing in these firms. Many of these firms are cheap because they are scary or because they are currently running a loss. These are long-term investments, and many of which will do poorly. Be sure you are comfortable enough with each stock so that you will stick to it through tumultuous times.

Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.

Source: 2012's Price To Book Bargains