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3 Stocks Worth Their Sub-$10 Price
For those investors who like to equate value with a low stock price, the stark reality is that the absolute share price has nothing to do with value. Would you rather own a $300 million company earning $50 a year in profit or a $3 billion company earning the same? Yet if the billion-dollar company had 500 million shares outstanding, and thus were trading at $6 while the million-dollar company had 5 million shares outstanding, or $60 a share, you'd be surprised at how many would buy a share for $6 instead of $60.
IN PICTURES: 5 "New" Rules For Safe Investing
Value First....
Instead of just throwing out three names under $10, we'll isolate the list to businesses that have solid operations, cash generation and an attractive valuation. In this regard, buying such companies could lead to promising results. Most institutional capital is barred from touching securities priced under $10, no matter how attractive the fundamentals. Yet the same institutions and mutual funds will buy the stock once it reaches $10 regardless of what little or no value may remain. In such instances, it can make fantastic sense to buy "low" priced stocks. But the purchase should always be predicated on tenets of value first. The possibility of investment funds piling in later is secondary.
...Price Second
Homeowners Choice (Nasdaq:HCII) is a Florida insurance company offering homeowners and renters insurance in the state of Florida. Shares trade for around $8 at a slight premium to book value. Management recently announced that the company would beginning paying a dividend of 40 cents a year, representing a forward yield of nearly 5%. The concentrated exposure to Florida could be a huge risk, but the company reinsurance coverage seems adequate to insulate the company from catastrophic losses, should a major storm hit. Compare HCII with another Florida insurer, Universal Insurance Holdings (NYSE:UVE) trading at a 60% premium-to-book and $5 a share and yields 8%. In addition, UVE has been growing its business out of its home state of Florida, reducing the company's geographic risk.
CapitalSource (NYSE:CSE) is a commercial lender that is seeking bank holding company status, which it should receive sometime next year. Like most commercial lenders CSE was hurt during the real estate meltdown in 2008, yet the company has done an excellent job of reining in its credit issues. Becoming a bank holding company will give the bank another lever of additional growth. Shares trade for $6.40, trading right at book value. It's a much cleaner lending play than Bank of America (NYSE:BAC), which trades at half of book value but is suffering from foreclosure issues that mask the ultimate true book value.
The Bottom Line
Price paid determines value attained. Simply paying a low dollar price for a share of stock does not imply a better value than a $50 stock until all the fundamentals are considered. (For related reading, take a look at 5 Must-Have Metrics For Value Investors.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 5 "New" Rules For Safe Investing
Value First....
Instead of just throwing out three names under $10, we'll isolate the list to businesses that have solid operations, cash generation and an attractive valuation. In this regard, buying such companies could lead to promising results. Most institutional capital is barred from touching securities priced under $10, no matter how attractive the fundamentals. Yet the same institutions and mutual funds will buy the stock once it reaches $10 regardless of what little or no value may remain. In such instances, it can make fantastic sense to buy "low" priced stocks. But the purchase should always be predicated on tenets of value first. The possibility of investment funds piling in later is secondary.
Homeowners Choice (Nasdaq:HCII) is a Florida insurance company offering homeowners and renters insurance in the state of Florida. Shares trade for around $8 at a slight premium to book value. Management recently announced that the company would beginning paying a dividend of 40 cents a year, representing a forward yield of nearly 5%. The concentrated exposure to Florida could be a huge risk, but the company reinsurance coverage seems adequate to insulate the company from catastrophic losses, should a major storm hit. Compare HCII with another Florida insurer, Universal Insurance Holdings (NYSE:UVE) trading at a 60% premium-to-book and $5 a share and yields 8%. In addition, UVE has been growing its business out of its home state of Florida, reducing the company's geographic risk.
CapitalSource (NYSE:CSE) is a commercial lender that is seeking bank holding company status, which it should receive sometime next year. Like most commercial lenders CSE was hurt during the real estate meltdown in 2008, yet the company has done an excellent job of reining in its credit issues. Becoming a bank holding company will give the bank another lever of additional growth. Shares trade for $6.40, trading right at book value. It's a much cleaner lending play than Bank of America (NYSE:BAC), which trades at half of book value but is suffering from foreclosure issues that mask the ultimate true book value.
The Bottom Line
Price paid determines value attained. Simply paying a low dollar price for a share of stock does not imply a better value than a $50 stock until all the fundamentals are considered. (For related reading, take a look at 5 Must-Have Metrics For Value Investors.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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