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. Myriad 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, an unbelievably difficult task for the individual investor.
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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 our article, 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. (Learn more about Benjamin Graham; see The Intelligent Investor: Benjamin Graham.) Graham was famous for only buying stocks that traded at prices less than two-thirds of their book value. 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.
As such, this methodology provided the individual investor with a rare opportunity to gain an upper hand on the stock market. While times have changed since Ben Graham's era, and low valuations are no longer as commonplace, the logic behind his strategy still holds true.
While there may not be as many stocks trading below two-thirds of book value, regularly scanning the market for companies with profitable operations - yet low P/B valuations - is a great way to begin searching for undervalued stocks trading below fair value.
Five Stocks With Low P/B Valuations
Here are five stocks with low P/B ratios that may hold potential to generate excess returns for your portfolio:
Ingram Micro (NYSE:IM)
|Horace Mann Educators (NYSE:HMN)||$653.9 M||0.81||9.7|
|Excel Maritime Carriers (NYSE:EXM)||$484.9 M||0.3||11.0|
|SYNNEX (NYSE:SNX)||$932.0 M||1.0||8.0|
|Boise (NYSE:BZ)||$493.3 M||0.77||5.3|
|Data as of Market Close July 28, 2010|
Book Value Bargain In Boise?
Boise, a paper product and packaging manufacturer headquartered in, you guessed it, Boise, Idaho, serves as an excellent example of a potential book value bargain that Ben Graham would likely look at. Typical of companies in its industry, Boise's balance sheet assets primarily consist of property, plant and equipment, and it has little in the way of intangible assets. In fact, as of its most-recently submitted financial statements (dated March 31, 2010), Boise's balance sheet reported $578 million in net tangible assets available to shareholders.
With 84.8 million shares outstanding, that equates to $6.82 per share of tangible assets. With the stock currently trading in the $5.80 range, investors buying BZ shares at this time are effectively buying the company's tangible assets at only 85 cents on the dollar. This creates a substantial margin of safety in the stock, as either Boise's operations or balance sheet would have to take a drastic turn for the worse to significantly reduce share price valuations.
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 company such as Boise provides a great example of how a simple metric such as P/B value can provide individual investors with a great lead in the search for undervalued stocks. Boise itself may turn out to be worthy of such a low valuation, but an entire portfolio of companies with valuations similar to Boise's is unlikely to end up a loser.
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