Towle & Co.'s Shopping List For U.S. And Asian Low Price-To-Sales Ratio Deep-Value Stocks

by: The Value Pendulum


I try to extend the boundaries of my deep value investment universe beyond asset-cheap opportunities like net-nets, net cash stocks and low P/B stocks in an opportunistic manner.

Towle & Co. is a deep-value fund manager which has delivered a 15.04% CAGR since its inception in 1982; the P/S ratio is one of the firm's differentiating factors.

I found 252 U.S. and Asian stocks with market capitalizations above $100 billion and profitable in the trailing twelve months trading below 0.2 times P/S.

Investment Universe

When I am asked to describe my investment universe, I typically answer that it is "wide yet narrow." On one hand, I fish for value investing opportunities in nine stock markets globally, including the U.S., Hong Kong, Japan, Southeast Asia and Australia markets. I am also generally market capitalization agnostic, investing across the spectrum from micro-caps to large-cap stocks. On the other hand, I am really focused on very specific niches within these markets comprising over 20,000 stocks, namely deep value balance sheet bargains (i.e. buying assets at a discount) and wide moat stocks (i.e. buying earnings power at a discount in great companies like "Magic Formula" stocks, high quality businesses, hidden champions and wide moat compounders).

Coming to the topic of this article, I tend to define deep value in the context of asset-cheap opportunities such as net-nets, net cash stocks, low P/B stocks and sum-of-the-parts discounts. Previously, I have extended the boundaries of my deep value investment universe to John Neff-style low PE stocks and low low enterprise value-to-operating earnings stocks as per Tobias Carlisle's definition of the Acquirer's Multiple. Today, I will explore another "new" deep-value investment metric and a deep-value investment manager that employs this as one of its search tools.

Towle & Co

I am generally interested in learning about the investment approaches and strategies of various value investors. Recently, a fund manager called Towle & Co caught my attention. Firstly, Towle & Co names its fund as "Towle Deep Value Fund" and claims to execute "deep-value investment discipline that uncovers significant discrepancies between stock market prices and underlying company values." Towle also screens using traditional value metrics such as low P/E, P/B and EV/EBITDA multiples, and its portfolio characteristics are reflective of the firm's deep value approach with a median trailing P/E of 12.85, a median P/B of 0.92 and a median EV/EBITDA of 5.72. Secondly, Towle & Co boasts an outstanding performance track record that validates its investment approach. Since the firm's inception in 1982, Towle has delivered a 15.04% CAGR as of December 31, 2015, compared with CAGRs of 11.83% and 11.48% for the Russell 2000 and S&P 500 over the same period.

Towle seemed no different from any other deep-value investment firm at first glance, albeit a successful one with an excellent track record, but something caught my eye as I reviewed Towle's profile and investment letters. Its portfolio had an extremely low median trailing price-to-sales (P/S) ratio of 0.26 times as of December 31, 2015. As I did more digging on the investment firm, I was fortunate to come across an interview with Christopher D. Towle, President of Towle & Co., who has 21 years of investment experience, having joined Towle since 1994. Chris Towle highlighted the P/S ratio, when he was asked whether there is a portion of Towle's investment process or philosophy that he would consider unique.

There are many analysts that say if you can buy a company for under 1x p/s it's a cheap stock. We traffic down in the .2-.3x p/s area. I think on a p/s basis we have the cheapest portfolio in the world probably. That gives us a unique philosophy as it relates to investing. We like it because you are buying a lot of revenue and economic activity on the cheap.

The Price-To-Sales Ratio

I first became familiar with the P/S ratio, thanks to Kenneth Fisher's book "Super Stocks", which was first published in 1984 and popularized the use of the then relatively unknown and underutilized metric. Ken is the founder, CEO and Co-Chief Investment Officer of Fisher Investments, a multi-billion dollar money management firm serving large institutions and high net worth individuals, and he is known for his Forbes "Portfolio Strategy" column.

On Fisher Investments' website, it is highlighted that Fisher's "1970s theoretical work pioneered an investment analysis tool called the Price-to-Sales Ratio, now a core part of financial curriculum." In Chapter 4 of Super Stocks titled "Pricing Is Everything - Use Price Sales Ratios," Fisher explained his rationale for using the P/S ratio.

Price Sales Ratios are of value because the sales portion of the relationship is inherently more stable than most other variables in the corporate world. If you've done your homework on the fundamentals of a company's business, it is possible to find companies where earnings have shifted from extreme profitability to losing small (or even large) amounts of money, while sales have temporarily flattened after years of rapid growth...The increased relative stability of sales, in relation to other financial yardsticks, allows you to use sales as an anchor to windward in the process of securities valuation...We have also seen that using PSRs allows investors a clearer and more stable vantage point from which to view stock valuation than any other single tool. It may be used either with companies earning money or losing it. It may be used when short-term profit margins are either extremely high or low. It may be used to assess what value a private buyer might pay to acquire an entire company.

Kenneth Fisher defines a Super Stock as "the stock of a Super Company which has been purchased at a Price Sales Ratio of 0.75 or less," and he refers to a Super Company as "a business which distinguishes itself because it can generate internally funded growth at well above average rates" with characteristics such as "high margins, high market share, better management, leading product positioning, a quality image." Since Fisher was potentially seeking a high quality business with superior growth prospects and using a P/S ratio of 0.75 as a yardstick, it is fair that Towle is fishing in the 0.2-0.3 times P/S region for deep value investment opportunities.

List Of Low P/S U.S. And Asian Stocks

Based on the results of my screen for low P/S stocks, there are 252 U.S. and Asian stocks with market capitalizations above $100 million and profitable in the trailing twelve months currently trading below 0.2 times P/S. I present the top 20 stocks on the list ranked by market capitalization below, while my subscribers get access to the complete list of the 252 low P/S ratio stocks.

Kindly note that this represents my own interpretation of Towle & Co's investment process, and Towle & Co. does not necessarily endorse my views.

Stock P/S Mkt Cap ($m) ROE EV/Sales EV/EBITDA Net Margin
McKesson Corporation (NYSE:MCK) 0.19 36,188 24.9% 0.23 8.84 1.2%
Fiat Chrysler Automobiles NV (NYSE:FCAU) 0.08 10,308 0.3% 0.14 1.92 0.1%
Marubeni Corp (OTCPK:MARUY) (8002 JP) 0.14 9,594 9.8% 0.56 18.25 2.1%
Tokyo Electric Power Co Incorporated (OTCPK:TKECY) (9501 JP) 0.14 8,210 56.2% 1.13 6.58 9.6%
Toyota Tsusho Corp (OTC:TYHOY) (8015 JP) 0.11 8,148 3.6% 0.27 8.36 0.7%
Bunge Ltd (NYSE:BG) 0.18 7,871 10.4% 0.28 6.74 1.7%
Fujitsu Ltd (OTCPK:FJTSY) (6702 JP) 0.18 7,662 10.8% 0.28 4.28 1.7%
Ingram Micro Inc. (NYSE:IM) 0.13 5,393 5.3% 0.13 7.77 0.5%
Alfresa Holdings Corporation (OTC:ALFRY) (2784 JP) 0.20 4,491 8.3% 0.14 7.24 1.1%
Medipal Holdings Corp (OTCPK:MAHLY) (7459 JP) 0.14 3,809 7.3% 0.13 7.13 1.2%
Companhia Brasileira de Distribuicao-ADR (NYSE:CBD) 0.20 3,772 2.4% 0.20 4.70 0.4%
Suzuken Co., Ltd. (OTC:SZUKY) (9987 JP) 0.18 3,498 6.5% 0.09 5.68 1.1%
World Fuel Services Corp (NYSE:INT) 0.11 3,406 9.9% 0.12 11.49 0.6%
Penske Automotive Group, Inc. (NYSE:PAG) 0.18 3,394 19.1% 0.42 12.47 1.7%
Nippon Yusen Kabushiki Kaisha (OTCPK:NPNYY) (9101 JP) 0.16 3,390 5.3% 0.48 6.52 2.1%
TonenGeneral Sekiyu KK (OTC:TGRLY) (5012 JP) 0.13 3,145 0.0% 0.22 13.38 0.0%
China National Building Material Co Ltd (3323 HK) 0.16 2,757 12.0% 1.94 8.73 6.4%
Tech Data Corp (NASDAQ:TECD) 0.10 2,731 12.3% 0.10 7.00 1.0%
Sojitz Corp (OTCPK:SZHFF) (2768 JP) 0.18 2,686 6.9% 0.54 15.50 2.4%
Mitsui OSK Lines Ltd (OTCPK:MSLOY) (9104 JP) 0.16 2,535 4.2% 0.79 12.39 2.0%

Piggybacking Towle & Co

Based on the most recent 13-F filing by Towle & Co., the firm's top 10 positions are Hawaiian Holdings Inc (NASDAQ:HA), Goodyear Tire & Rubber Co (NASDAQ:GT), SkyWest Inc (NASDAQ:SKYW), PBF Energy Inc (NYSE:PBF), Flextronics International Ltd (NASDAQ:FLEX), Valero Energy Corp (NYSE:VLO), Atlas Air Worldwide Holdings Inc (NASDAQ:AAWW), Sanmina Corporation (NASDAQ:SANM), Ingram Micro Inc and Trinseo SA (NYSE:TSE). Note that Ingram Micro, Towle & Co.'s current holding, was one of the 20 stocks in the list above, sporting a trailing P/S multiple of 0.13.

Towle & Co. did not initiate any new position in the fourth quarter of 2015, but it added significantly to its existing positions in Ryerson Holding (NYSE:RYI), Blount International (NYSE:BLT) and Tribune Publishing (NYSE:TPUB) during the quarter, which are currently valued by the market at trailing P/S multiples of 0.05, 0.58 and 0.15 respectively.

Note: Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service get full access to the watchlists, profiles and idea write-ups of deep-value investment candidates and value traps, which include net-nets, net cash stocks, low P/B stocks and sum-of-the-parts discounts.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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