People can argue all day about whether book value is a good indicator of a stock’s value.
I say yes, and I believe the results in this column tend to prove it. Book value is the net worth of a business – the sum of its assets minus its liabilities. It is generally expressed per share, ie the total amount divided by the number of shares in circulation.
Today is the 22n/a column I wrote about stocks selling for less than their book value. The average one-year return of the first 21 columns was 16.6%.
I’ll take that back anytime. It compares well to the one-year average return of the Standard & Poor’s 500 Total Return Index for the same 21 periods, which was 10.4%. Of the 21 sets of low-cost picks, 15 were profitable and 14 beat the S&P 500.
Last year I had big winnings and compensating losses. Dorian LPG (LPG) returned 105% but Argonaut Gold (ARNGF) lost 88%. Graham Holdings
Keep in mind that the results in my column are hypothetical and should not be confused with the results I get for clients. Also, past performance does not predict the future.
Here are my new picks from stocks sold below the book. I will start with Capital one
, a banking company based in McLean, Virginia. It is the tenth largest bank in the United States, ranked by assets. You might know this from TV commercials with the tagline “What’s in your wallet?”
Compared to most banks, Capital One puts a lot more emphasis on credit card lending. It is also active in automobile loans and commercial loans. It is relatively light on physical branches and on mortgages. Some of its branches are cafes.
The stock is cheap, selling for around five times earnings and just below tangible book value. Many people think a recession is coming; therefore, they are unwilling to pay for a bank with high exposure to credit cards.
Besides its cheapness, I like Capital One’s historic growth rate – about 7% per year for sales and profits over the past decade.
Kelly Services (KELYA), based in Troy, Michigan, is one of the largest recruitment companies in the United States (it recently ranked fourth in the sector, according to Statista.) Its shares are selling for 0.53 times book value and 12 times earnings.
Kelly’s profitability has been disappointing. He has lost money in three of the last 15 years, and there hasn’t been a single year that I would consider excellent. However, I think things will probably get better. You read a lot these days about companies struggling to find qualified employees.
So it seems to me that it should be a good time for recruiting companies. After posting no revenue growth over the past decade, Kelly has increased revenue by about 7% over the past year. It’s a beginning.
An almost debt-free choice is Searing genetics (FLGT). Based in Temple City, Calif., the company performs genetic testing for doctors and hospitals. It branched out to do Covid-19 testing, and revenue from that source soon eclipsed its core business. Now Covid test revenue is shrinking.
That’s why the stock is so cheap, selling for just 0.9 times book value and less than five times earnings.
Basic incomes (excluding Covid), although low, are increasing. And the company has $571 million in cash and marketable securities. At its current price (around $39 per share), I think Fulgent is attractive.
It recently appeared on my casualty list, containing stocks that have been reversed in the last quarter that I believe can recover and thrive.
Cards, anyone? WestRock
, based in Atlanta, is one of the nation’s largest producers of packaging, such as corrugated boxes and folding boxes. If people continue to buy more of their goods on the Internet, the need for shipping containers will only grow.
I have sometimes played this theme through Packaging Corp. of America (PKG), but the reasoning is similar with WestRock. The former is more profitable, but sells for three times book value while WestRock sells for 0.84 times book value.
Of course, companies that sell below book value are cheap for a reason. They have problems, and everyone knows it. But on the stock market, it’s not necessarily bad. It is often better to buy a cheap stock with tangible problems than an expensive stock with hidden problems.
Disclosure: One or more of my clients own stock in Packaging Corp. of America.