How to Find the Right Bargain Stocks Amid the Market Selloff
The most popular way for investors to assess companies involves price/earnings ratios, but book value also can be a good evaluation tool.
Value-oriented investors in particular focus on companies with low price/book ratios because book value, or shareholder equity per share, can provide downside support as a proxy for a company’s liquidation value.
A focus on book value has its pitfalls and can lead investors to companies with poor returns or prospects, but it also can yield potential bargains. Value investing legends like Benjamin Graham relied on book value. It’s a good starting point for value buyers.
With the recent market selloff-the Dow Jones Industrial Average has dropped 9.7% in December-there are now plenty of familiar stocks trading below book value. They include Citigroup (C), Goldman Sachs Group (GS), American International Group (AIG), Allergan (AGN), PG&E (PCG), MetLife (MET), Loews (L), Fiat Chrysler Automobiles (FCAU), Ford Motor (F), Morgan Stanley (MS), Molson Coors (TAP), Prudential Financial (PRU), Kraft Heinz (KHC), Western Digital (WDC) and Lennar (LEN), which was highlighted in a recent Trader column.
Some supercheap stocks based on price-to-book are Transocean (RIG), which leases offshore oil rigs, and Brighthouse Financial (BHF), a provider of annuities and life-insurance products. Transocean, at around $7, and Brighthouse, at $31, fetch around 30% of book value. The S&P 500 trades for around three times book value.
There are plenty of energy stocks trading below book value after the recent plunge in oil prices, including Parsley Energy (PE), Encana (ECA) and National Oilwell Varco (NOV).
Many of these stocks turned up in a Bloomberg screen of companies in the S&P 500 trading below book value. There now are 35 such stocks.
Some investors believe that tangible book value is a better gauge than book value because it excludes goodwill and other intangible assets that are factored into book value. Tangible book is a harder measure of shareholder equity and better measure of a conservative liquidation value.
Goldman Sachs for instance, trades around $162, below its tangible book value of around $186 and Jefferies, at $17.50, languishes at a discount to its tangible book value of $24 a share. Allergan, in contrast, has negative tangible book value because of a large amount of goodwill and intangible assets. These intangibles often arise from acquisitions. For most financial companies, tangible book value tends to be close to book value.
Investors should be careful of companies that look cheap based on book value or tangible book that are operating in the red. Those that are profitable can prove excellent investments if the markets ultimately recognize the value in the businesses.
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