Even in the best of times, the stock market can prove to be an erratic and unpredictable place. Stocks that once seemed to be the unparalleled champions of Wall Street can take sudden, unexpected tumbles, shedding their once-glamorous positions to become troubling eyesores in investors' portfolios.
From the individual investor's point of view, the challenge is to avoid these potential pitfalls from the beginning by attempting to identify the stocks least likely to suffer serious share-price declines in the future. Unfortunately, this is all-too-easy to say, and extremely difficult to do. A myriad of factors can affect the future value of any given company, making the task of predicting the future for a single stock - let alone an entire portfolio - unbelievably difficult for the individual investor.

IN PICTURES: World's Greatest Investors

Find a Better Future With Book Value
That said, focusing on a few key factors will go a long way toward reducing your chances of ending up with an eyesore portfolio in the future. Research has shown that stocks purchased with low price-to-book (P/B) ratios will, on average, have less downside risk than the average stock and tend to outperform the overall market average as well. (Learn more about book value in Digging Into Book Value.)

In fact, it is this basic (yet powerful) strategy that was employed successfully by none other than Benjamin Graham, who is generally considered to be the creator of the value investing discipline. Graham was famous for only buying stocks that traded at prices that were less than two-thirds of their book values. His reasoning was that while any given stock with a low P/B ratio could end up being a loser, an entire portfolio of low P/B stocks would, on average, do quite well. (To learn more about Benjamin Graham, read The Intelligent Investor: Benjamin Graham.)

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 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, often 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 their book values deserve to because they may have problems and will never be industry leaders.

Five Stocks With Low P/B Valuations
Let's check out some stocks that are trading at a price-to-book ratio of less than 1, and which may be worthy of follow-up research. Here are four stocks with low P/B ratios that may have the potential to generate excess returns.

Company Market Cap Price/
Book
Forward P/E
Bank of America (NYSE:BAC) 114.79B 0.5 7.78
Citigroup (NYSE:C) 119.39B 0.73 8.93
Bunge (NYSE:BG) 8.66B 0.77 11.37
Toyota Motor Corp. (NYSE:TM) 112.43B 0.90 19.12

The Bottom Line
Despite all the technological advances the markets have seen since the days of Ben Graham, the lessons he provided still hold true to this day. A simple metric such as P/B value can provide individual investors with a great lead in the search for undervalued stocks.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
  5. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  6. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  9. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  10. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center