A company that is growing its book value at a good clip while the stock still remains cheap based on traditional valuation measures surely deserves a deeper review. A growing book value might mean a lot of things. It could mean some assets were marked up, perhaps due to a liquidity event (for example, selling a division or a factory at market prices), or some extra ordinary gains in the near past such as usage of tax loss carry-forwards or a litigation settlement gain. It could also mean that the company has grown its book value by accumulating profits and if the stock price is cheap, it may just be an opportunity that the rest of the market has not discovered.
The following list of 5 stocks were chosen for the following criteria:
- 5 year average book value growth in the top 20% of its industry
- PE ratio in the bottom 20% of its industry, and,
- Return on Equity in the top 20% of its industry
By focusing on industry level metrics, we are able to remove the industry specific influences on the valuations. For example, certain industries may typically exhibit higher Price multiples, while certain others may exhibit lower multiples. This screen essentially requires that irrespective of how the industry on average is valued, we only want the cheapest stocks relative to its peers within that industry.
Of course, in the go go years of internet mania, you might have still ended up with a tech stock with a P/E of 30. Therefore it makes sense to discard from this list the stocks that may be part of a sector or industry specific bubble. Thankfully, currently the valuations are not as perverse.
(All $s in millions)
1. EBIX Inc (EBIX):
|EBIX||Ebix Inc||Software – Application|
|Market Cap||592||5 Yr Avg BV Growth|
|P/B||1.68||5 Yr Avg EPS Growth|
Ebix, Inc is a on-demand software and e-commerce provider to the insurance market. The company connects multiple entities such as insurance providers, sellers, and reps with data exchanges in the life insurance, P&C, worker’s comp and other markets in the United States, Australia and New Zealand. Ebix has been trying to grow through acquisitions in a highly fragmented industry and with the recent health care mandate, one could reasonably expect the insurance exchange business to pick up steam over the next few years. The stock has been a target of many shorts recently high on hope with little credible supporting arguments, so perhaps this makes for a great entry point.
2. Encore Capital Group (ECPG):
|ECPG||Encore Capital Gr||Credit Services|
|Market Cap||694.3||5 Yr Avg BV Growth|
|P/B||1.59||5 Yr Avg EPS Growth|
As a debt collection and recovery service company focused on the consumer side, it is hard to imagine the company not doing well in the last few years. Earnings and the equity has grown rapidly while the stock still remains relatively cheap. A PEG ratio of 0.58 reflects high growth expectations which may or may not come to pass depending on the actual economic recovery. If you feel that employment and consumer wealth will improve in the near future, you may want to pass on the stock. However, if you are much more pessimistic about the future, then this may be a good stock to buy now.
3. 8×8 Inc (EGHT):
|EGHT||8×8 Inc||Communication Equipment|
|Market Cap||474.6||5 Yr Avg BV Growth|
|P/B||3.6||5 Yr Avg EPS Growth|
8×8, Inc. develops and markets telecommunications services for Internet protocol (IP), telephony, and video applications. It also offers contact center, Web-based conferencing, and unified communications services, as well as cloud-based computing services. You may recognize 8×8’s Polycom brand of ip phones. The company carries no debt and almost $40 million in cash on the books.
4. GT Advanced Technology (GTAT):
|GTAT||GT Advanced Techn||Semiconductors|
|Market Cap||397.9||5 Yr Avg BV Growth|
|P/B||1.04||5 Yr Avg EPS Growth|
$400 million in market value and $480 million in cash on the books forces you to seriously consider the stock. The company does have approximately $300 m in debt but it is profitable. GTAT is a specialized semiconductor company serving the solar market, and as such is suffering from the consequences of the glut in the solar supply chain. The stock has lost 55% in the last 12 months and it is unclear if this is as bad as it gets. When the solar cycle turns around, expect a solid appreciation in the stock.
5. Hawaiian Holdings (HA):
|Market Cap||324.8||5 Yr Avg BV Growth|
|P/B||1.11||5 Yr Avg EPS Growth|
Hawaiian Holdings operates Hawaiian Airlines, a regional airline connecting Hawaiian Islands to each other and the US mainland. The company recently announced new service to Taiwan, Australia and New Zealand and has been enjoying increasing revenues and passenger traffic. The balance sheet is quite strong as well. Not all airlines are created the same and Hawaiian operates on some of the more profitable routes. The stock is attractive at the current levels and a recovering economy along with declining fuel costs (a big if) will help it grow its margins even more.
Ultimately when we are looking for book value growth, we will more or less find companies with high expected future growth rates. Analysts do project the future based on the past performance and it is understandable as much of the business momentum continues. The current valuation reflects the market’s optimism or pessimism about the growth and while expectations and reality do not align in almost 100% of the cases, looking for companies that are undervalued gives us protection on the downside along with a potential upside if even a small portion of the growth does take place.