In, The Little Book of Value Investing, the author notes that one should buy stocks like they buy steak -- when they're on sale.
"In the meat isle you discover that one of your favorites, prime Delmonico steak is on sale, down to just $2.50 a pound from the usual $8.99 a pound. What do you do? You load up the cart with this delicacy while it is cheaply priced. When you return next week, and see those Delmonico steaks on sale for $12.99 a pound, you pause. Perhaps this week chicken or pork might be a better buy." -- Christopher H. Browne, The Little Book of Value Investing
It's always amazing to watch the crowd rush in at the wrong times in the stock market because they are afraid to miss the action when times are good -- they buy the $12.99 Delmonicos and wouldn't touch the same product if it were a fifth of the price. Browne's steak/stock analogy holds as true today as ever before. The book follows up the statement by saying that no one actually operates like this in the stock market... The Author goes on to make a poignant statement which I think relates well with the current vertical rise of the overall stock market;
"In the stock market there is the irresistible excitement and lure of the hot stocks everyone is talking about at cocktail parties. The ones that are the darlings of the talking heads on the cable stock market shows." -- From The Little Book of Value Investing
In today's new new new bull market craze, many of the cheapest issues in the post Lehman era have actually not rallied off of their lows. Some of these laggards are likely undervalued and poised to rebound regardless of the overall market. Here are 5 stocks to research that appear to be on sale. Keep in mind, sometimes those Delmonicos can be priced at $2.50 a pound for a very good reason.
National Western Life (NWLI) -- National Western is a fairly large company most investors know nothing about. With over 1.2 billion in shareholder equity, the company is well positioned to grow in the emerging market life insurance industry. NWLI serves many countries, including the United States and has produced strong growth in their annuity businesses. For the past few years, life has been slow but the slack has been made up with sales of new annuity products. National Western is undervalued at .39X tangible book value (that Delmonico is priced pretty well here) but we'll have to dig a little deeper into the asset side of the balance sheet to see if it's cheap for a good reason.
At 7X earnings, we see that NWLI shares are actually decent looking on a going concern basis as well as an asset play. Things to keep in mind here include the fact that the chairman and CEO don't like to buyback stock or pay dividends, which is more than a bit irritating to some investors in the name that I have spoken to, though most investors will note that the book value has risen to $354 a share from something like $5 a share in the 1970's -- clearly a well run business.
What worries investors in our view here is the increasing leverage ratios on the books. We think that is an accounting issue related to the sales of annuities and is less risky than it looks. That said, we have to be skeptical of deferred long term asset charges, and NWLI's book value is heavy on the "other" type of assets versus cold, hard cash. We think NWLI is a long term buy but caution that this is a fairly illiquid stock and should be bought in small lots with an eye to increase your holdings when it goes on sale and not vice versa.
USEC, Inc. (USU) -- After Fukushima and all of the difficulties with loan guarantees that this company has faced, USEC still has an incredible $1.3 billion in net assets while the company's market cap is just 169MM. USU actually comes with a forward PE of 7X to go with that .13X price to book value ratio. USU appears to be on the right track as far as funding is concerned as the President included $150MM in funding for USU's "American Centrifuge Project" which has turned out more or less dreadfully for current and former shareholders over the recent past. The fact that USEC still has a future is completely shocking for those who have followed the stock over the past year. USU is a cheap piece of meat, but you have to wonder if the price you pay is cheap for a reason. In USU's case, I think the market is overly pessimistic about the future of the Pinkerton debacle. If things resolve favorably, a 10X investment could be had.
Books A Million (BAMM) -- Books A Million is our next contestant in our great Steak Stock challenge. While BAMM is no Steak and Shake circa 2008, the stock is dirt cheap on book value and cash flows. Most investors believe that stores and books are both doomed. Tell them that BAMM is a publicly traded book store, and they will gasp at you and try to find shares to short. That's precisely the trouble with BAMM -- no one wants to hear about a bookstore stock at the cocktail party! At 39% of tangible book value, BAMM is pretty reasonable, but we wouldn't buy it until it gets a little cheaper. The Kindle/Nook revolution is a serious threat, even if it is exaggerated by the main stream financial media and talking heads. Books A Million likely has a future regardless so long as they can adapt to changing digital times. The company has been aggressively expanding its footprint in recent months, snapping up Borders' leases and growing their store count. While I think it's a bold move, I don't know how this will play out over the long run. One thing is certain, if the book business bottoms to a degree, BAMM will be a very nice place to invest.
Presidential Life (PLFE) -- PLFE is a name that always trades book value it seems, but over the years the underlying business has actually performed well. In fact, since December 2008, Presidential Life has actually doubled their book value per share for investors. Too bad the crowd could care less on Wall Street, because PLFE is trading for only 40% of book and fetching just 8X earnings. While PLFE has delivered unimpressive short term numbers with a 5% ROE, over the longer term I expect the company to continue putting up solid earnings.
Valero (VLO) -- Valero is looking quite cheap here at 80% or so of tangible book. VLO's book value is rapidly growing thanks in part to a wide spread between the price of gas and the price of oil. That spread may shrink if crude prices continue their relentless march higher. VLO is dirt cheap on trailing earnings at 7X and shows a forward PE estimate of around 6X earnings. That's pretty reasonable when combined with VLO's 3.8X EV/EBITDA multiple and .8X price to book. Valero appears to be Filet Mignon selling for Top Sirloin prices.