Keeping an eye on the company's books is an important part of any value investor's healthy regimen. After all, what is a high or low share price without a measure to compare it against? When it comes to stocks, one investor's trash becomes another's treasure with every completed transaction. So it comes as no surprise that share prices often reflect a measurement of sentiment rather than truly being dependent upon the intrinsic value of a company.
As there are several approaches to value in any given situation, the two we are focusing on here is what someone is willing to pay for ownership in a company and what the company's equity is tangibly worth on the basis of its costs. By measuring the differentiation between the two, one can assume that the greater the difference, the more likely it is that one of these measures of value is failing to accurately represent the company fairly. The price-to-book ratio (P/B) is the best method to accomplish this goal. The lower a company's P/B is below 1, the more likely it is that a company has either overvalued its assets or that it's trading at a discount towards an accurate worth of its present condition.
Therefore, the following companies compile a potential list of value plays worthy of consideration. By screening companies that have market capitalizations above $1 billion, we can presume there is a lesser chance for overstated assets, barring the risk of corporate irresponsibility. Naturally, each company has developed reasons for trading at their current levels which require further due diligence. Nevertheless, when a company can theoretically liquidate its assets today at values well above what its share price currently represents, investors can have a greater degree of confidence that a potential value situation could be presenting itself. The following companies are some of the market leaders in their respective industries that are trading at very low P/B ratios.
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|Company Name||Last Price||Book Value/Share||Price-to-Book Ratio||Industry|
|Veolia Environnement S.A. (VE)||$12.37||$19.50||0.63||Waste Management|
|Korea Electric Power (NYSE:KEP)||$11.53||$29.41||0.39||Electric Utilities|
|Hartford Financial Services Group (NYSE:HIG)||$19.90||$49.89||0.40||Insurance & Financial Services|
|Arcelor Mittal (NYSE:MT)||$22.20||$36.60||0.61||Steel|
|MEMC Electronic Materials (WFR)||$5.39||$9.75||0.55||Silicon Wafers|
|Alpha Natural Resources (ANR)||$21.04||$36.77||0.57||Coal|
Some notes considering the aforementioned companies:
- Veolia is facing lawsuits concerning accusations of improper accounting practices, along with an operational environment of growing uncertainty. Nevertheless, the company is one of the largest water infrastructure and sanitation leaders in the world. With a forward dividend yield of 11.8% and a forward price-to-earnings ratio of 11.89, the company may be far from a sell at these levels barring a company-ending scandal.
- Korea Electric has historically traded at a severe discount to its book value. Yet despite the uncertainty of the region, the company is growing fast and has significant cash flows. Despite its current $14 billion market capitalization, the company had about $5 billion in cash flows from operating activities in 2010.
- The uncertainty behind insurance companies as a whole have kept the Hartford Financial Services Group at bottom lows alongside the others. With a current forward price-to-earnings ratio of 5.92, the company appears to offer significant value to its investors.
- Arcelor Mittal has suffered the wrath of fears over Europe in regards to a lasting Recession. As the largest steel producing company in the world, the company bore the brunt of such uncertainty.
- The Great Recession cast Cemex's market value into near oblivion. With an ill-timed acquisition, a global real estate market that has yet to fully recover, and a large overhanging debt burden on its shoulders, the company had been practically marked for bankruptcy. The company has recovered nicely over the past few weeks.
- MEMC Electronic Materials has been hit hard with the crash of the solar industry in 2011. A possible recovery in the solar industry for 2012 can be advantageous for the outlook of MEMC.
- With coal mining falling out of favor to the investing public, Alpha Natural Resources continues to hover around its 52-week lows. A rough acquisition of Massey Energy failed to support the company's share price in 2011. Yet the company's output remains an essential commodity, and the company is beginning to close its loose ends from the acquisition.
Disclosure: I am long VE, MT, ANR.