Generally, buying businesses trading below book value has proved to be a good bet, provided that the book value figure can be relied upon with reasonable confidence. The idea of buying a businesses for less than the value of its net assets clearly has lots of appeal: one of the most important ideas in stock investing is that stocks are generally undervalued if they can be purchased below the replacement cost of those assets.

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A Short List
Needless to say, the pleasant offerings that 2009 bestowed on equities has all but eliminated stocks trading below book value. And for many of those that do remain, a closer look inside the balance sheet reveals lots of intangibles, goodwill, or other assets (like inventory) that are likely to be worth substantially less in today's environment. Today's list will include names like grocery store chain Winn-Dixie (Nasdaq:WINN), a name that will likely draw a passing interest for most investors. Yet, in addition to a share price that is 0.63 of book value, this $550 million market cap company has over $120 million in net cash. And even when you strip the intangible assets, tangible book value is nearly 20% above the current share price. (For more, see Oil And Gas Industry Primer.)

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Unloved Stocks
As an industry, investors will find nearly all of the oil refiners trading below book. Refiners today are being left for dead, never mind the fact that the cost and time to build an oil refinery would clearly be much more than the value that is being currently ascribed to the refiners. That said, investors should note that the refining business continues to suffer from reduced gasoline demand and lower spreads, or the difference between the cost of oil and the price of refined products. And the fact that most refiners are saddled with debt isn't helping the cause either.

Nevertheless, Valero (NYSE:VLO), the biggest refiner, trades for two thirds book value. Valero has been making some strategic investments in ethanol plants, buying them at fractions of the prices they commanded years ago. Tesoro (NYSE:TSO), another quality refiner, also fetches two-thirds book value. Interestingly, the one major refiner that trades at a premium to book, Frontier Oil (NYSE:FTO), also happens the be the one with a debt-free balance sheet. Interestingly, should the refining business improve over the next couple of years, the more levered names will experience higher growth rates, since leverage is the double-edged sword in good and bad times.


Bottom Line
It's always a good idea to screen for stocks trading below book value. Often, there may be a good reason for such a valuation, but such a list can also turn up a gem or two that could lead to market-beating gains. (For more, see Digging Into Book Value.)

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