I'm currently reading "The Little Book of Value Investing" by Christopher H. Browne, a former managing director and now special advisor at Tweedy Browne, an investment management and stock brokerage firm that has been around since the 1920s and part of the Browne family for the last 64 years. Strict value investors look to buy stocks at 40-50% of intrinsic value and to sell when the price gets close to their estimate. For those who want to learn about value investing without having to slug through a 400-page tome, Browne's book is definitely the way to go.

One of the main themes of the book concerns buying stocks trading at less than book value. Using apparel retailers as my study group, I'll examine five companies to see how book value has affected their stock prices since 2005. The results are surprising. (To learn more about book value, read Digging Into Book Value.)

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Retail's Adjusted Book Value 2005-2009

Company 2005
Adjusted Book Value
Latest Quarter Adjusted Book Value % Increase
Adjusted Book Value
% Stock Return
2005-2009
Children\'s Place (Nasdaq:PLCE) $299.2M $508.2M 69.9% (10.88%)
Aeropostale (NYSE:ARO) $237.2M $414.7M 74.8% 71.31%
Buckle (NYSE:BKE) $286.2M $306.0M 6.9% 122.95%
JoS. A Bank (Nasdaq:JOSB) $112.8M $356.9M 216.4% 83.12%
Gymboree (Nasdaq:GYMB) $203.0M $358.9M 76.8% 240.87
S&P 500 N/A N/A N/A (7.84%)



Adjusted Book Value
Browne describes book value as the amount left over after you've subtracted what you owe from what you own. He then goes a step further and subtracts intangible assets from the resulting book value because he wants a truer picture of the potential equity available. For the purposes of this exercise (and for my sanity), I'll use other long-term assets instead of intangible assets because this number is more readily available at aggregator sites like Yahoo! Finance and Morningstar. It's not perfect, but it'll still give you a good idea of who's building shareholder value. Warren Buffett uses annual growth in book value per share as one of his primary evaluators of Berkshire Hathaway. It's that important.

Buckle At The Bottom
The first thing I notice when I look at the table is that Buckle, my favorite retail stock, is at the bottom of the list in terms of book growth. How is it that such a successful business and one so conservatively run can be at the back of the pack in terms of adjusted book value growth? The answer is dividends and share repurchases. With store expansion moving along at a moderate pace and cash requirements minimal, the only solution for all the profits it is generating is to return much of the cash to shareholders in the form of dividends and share repurchases. Since fiscal 2005, it has paid out $502.7 million that otherwise would have ended up in retained earnings. Otherwise, its five-year increase in adjusted book value would have been around 182.6% and far better than all but JoS. A. Bank.

Bottom Line
Book value is a tricky thing. You want it to be as high as possible, but not at the expense of shareholder returns. Buckle management believes the best solution is to give back its free cash rather than sit on it like Warren Buffett did until he blew the bank buying Burlington Northern railway for $44 billion. Time will tell if Buffett's right or not. As for book value, it's easy for Buffett to use its growth to gauge his success because he doesn't pay dividends or repurchase shares. If he did, you can bet he'd have a whole different viewpoint on the subject. (Learn from the best! Read Think Like Warren Buffett.)

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