Of course, the stock market is expensive. But some stocks still sell for less than their book value (essentially the equity of companies).
Why should you care? Because, despite skeptics who say book value is an outdated measure, buying stocks below book value can be a very profitable strategy.
Starting in 1998, I dedicated 20 columns to stocks that sell below the book. The 12-month average total return of my selections was 17.1%, well above the 11.8% figure of the Standard & Poor’s 500, an index that seemed close to unbeatable in recent years. Fourteen of my 20 columns showed profit, and 13 beat the index.
Keep in mind that the results in my column are hypothetical – they do not reflect actual transactions, transaction costs, or taxes. These results should not be confused with the performance of the portfolios I manage for clients. In addition, past performance does not predict future results.
Last year, my below book picks returned 51.1%, topping the S&P, which posted a 34.2% gain. Three of my four picks beat the index, with the largest gain (88%) coming from G-III Apparel Group Ltd. (GIII). The worst performing was Photronics
And now, how about a few new applicants?
Loews (L), based in New York, is the headquarters of the Tisch family, who have controlled the company since its inception in 1946. It owns 89% of CNA Financial
In the past, Loews owned Lorillard Tobacco Co., Bulova Watch Co., the Loews movie theater chain, and part of the CBS broadcast. Obviously, the Tische are willing to buy and sell assets, but they tend to hold their holdings for a substantial number of years.
The stock has lagged behind, returning only 54% over the past decade (including dividends), while the S&P 500 has returned 358%. But in an expensive market, this stock is very cheap, logging in at 0.8 times book value, nine times earnings, and 1.1 times income.
Based in Stamford, Connecticut, Dorian GPL SA. (LPG) transports liquefied petroleum gas internationally thanks to a fleet of 22 specialized tankers. Liquefied petroleum gas, or LPG, is different from liquefied natural gas or LNG. The first is propane or butane; the latter is methane. But I think the economy of both will be similar and the United States will be a major exporter of both.
Dorian’s earnings history includes eight years; it was profitable in five. Profitability seems to be improving and the stock looks very cheap to me at 0.55 times book value and seven times earnings.
I bring back Graham Holdings Co
from last year’s list. It brought in 41%, but I think there is room for further gains.
It is the remnant of the old Washington Post empire. The post itself has been sold to Jeff Bezos (director of Amazon.com), and the main remaining asset is the Kaplan chain, which offers test prep and job training. It also has television channels, home care and palliative care centers.
Over the past ten years, Graham has increased his book value by 7% per year and the growth has accelerated in recent times. Yet the stock only sells for 0.77 times book value and six times earnings – extremely cheap multiples in any market, and especially this one.
Finally, and speculatively, I recommend Argonaut Gold (ARNGF), which is a “penny stock”, meaning that it sells for less than $ 5 per share. Argonaut sells for a little less than book value and less than six times profit. His 14-year earnings history includes seven annual wins and seven losses.
A Canadian company headquartered in Reno, Nevada, Argonaut mines gold primarily in Mexico and Nevada. One of the holders is Donald Smith, an investment manager known for buying shares below book value.
The price of gold strengthened from a low of around $ 1,200 an ounce in September 2018 to a high of around $ 2,000 in August 2020. Since then, its trend has been choppy with a downward bias; the price at the time of this writing is $ 1,819 per ounce. With gold at this price, Argonaut has posted a profit for four consecutive quarters.
With a whiff of inflation in the air and with central banks aggressively printing money, I think the current climate bodes well for gold and gold-related investments.
Disclosure: I have no position on the stocks discussed this week, personally or for clients.