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Tickers in this Article: RCL, CCL, DLM, SFD, VOD, SHLD
Ben Graham, who is known by many as the father of value investing, liked to construct portfolios with stocks that traded with a low multiple of book value, usually under two-thirds book value. That's how he spotted bargains.

Many believe that buying stocks below their book value may help to protect against the potential downside. It also could mean big upside if and when the masses start to warm to the story and to bid the stock higher. (Learn more on book value, in our article Digging Into Book Value.)

But Everyone Wants a Bargain
The problem is that buying stocks under book value isn't always easy. Savvy investors are already aware of this strategy, and so when such bargains arise, they are often scooped up in short order. The widespread use of screening technology by retail and institutional investors has eliminated much of the detective work that Graham was forced to do during his time. (To learn more, read Getting To Know Stock Screeners.)

It is important to note that this method of investing is not a guarantee for success. In fact, sometimes "cheap" stocks remain cheap for good reason. It may take many years for the masses to appreciate them, or they may never be discovered at all. Some companies that trade below book value deserve to, because they may have problems and will never be industry leaders.

With all of that in mind, the following is a list of stocks that traded at a price-to-book ratio of less than one, which may be worthy of follow-up research.

Company
Market Cap
Price/Book
Carnival Corp. (NYSE:CCL)
21.1 billion
0.95
Del Monte Foods (NYSE:DLM)
1.5 billion
0.95
Smithfield Food (NYSE:SFD)
1.3 billipn
0.45
Vodafone (NYSE:VOD)
98.7 billion
0.85
Sears Holding (NYSE:SHLD)
7.3 billion
0.79
Data as of market close April 30, 2009
Carnival Corp
Travel-related stocks are not doing so well right now. Especially if the travel is non-essential and is linked to a current fear, such as the new flu. Carnival has a decent P/E of nine, but that's not as good as Royal Caribbean's (NYSE:RCL) P/E of seven. The A(H1N1) flu of 2009 is going to hurt sales no matter which way you slice it, but lets look at the numbers. According to the Centers for Disease Control and Prevention 200,000 individuals are hospitalized each year from the common flu, about 550 per day. 36,000 die per year from flu related causes (98 a day). Those are just the numbers, some years are higher and some are lower. Fear seems to be taking over and causing havok on travel stocks. This is not something to ignore. Obviously, fear can cripple a stock in the short term, which could create good entry points for the long-term investors.

Both companies have said they will suspend stops to Mexican ports. But how does that affect the bottom line of the companies? The travelers have already paid and new vacationers will still buy, unless they are afraid of being around other people. Not exactly the typical cruise passanger anyway. Over the long haul, fear eventually subsides. With a price-to-book ratio of around one, Carnival looks like a good value, and if there is a further pullback it could look even more tempting. Both will see tougher times throughout this recession. Once the flu scare dies down, this value could be increased for shareholders. (Learn to pounce on the opportunity that arises when other traders run and hide, read Buying Fear.)

Del Monte Foods has a good P/B ratio of 0.95; Smithfield Foods has a great ratio at 0.48. Del Monte has been increasing cash and equivalents and decreasing its long term liabilities, exactly what you look for in a value play. In a recessionary environment, food companies tend to weather the storm as descressionary spending is cut. Sales are remaining strong and net income in the most recent quarter was $60.5 million, up 13.5% over one year earlier in its most recent quarter.

Bottom Line
Buying stocks that trade under book or at a low multiple of book value is no guarantee of success. However, it can limit the downside potential, and if the masses eventually warm to the story, it could mean big upside. (For more on analyzing stocks using ratios, be sure to check out our Ratio Analysis Tutorial.)

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