The Following 6 Stocks Are Trading At or Below 0.5 x Book Value–Sep 2013

One of the most basic screens to find undervalued stocks, Price less than the book value per share can indicate a possible attractive investment. This month’s book value screen uncovered the following 6 stocks that I strongly encourage you to review further.

To screen for the following stocks, I have gone a little beyond just looking for P/B < 1. These stocks trade for half or less than half of the book value per share. Almost all these stocks represent profitable businesses (except COCO, which is close to breakeven). When apparent valuation seems so attractive and the companies are making money, one should naturally ask the question “Why?”. What may be the cloud hanging over the business that makes the investors afraid? Once we get an answer to this, the next logical question is whether this pessimism is justified. If it is not, than you just found a perfect stock Smile

With that in mind, spend some time over the following 6 stocks to see if they are now ripe for investment.

1. StealthGas Inc (GASS, Mkt Cap: $257.18m, Type: Small Cap)

The stock price of this oil shipper is 0.56 times its book value and represents the most expensive stock (compared to book value) in this list. The company is based out of Athens, Greece and provides international shipping service for crude oil, lpg, and other petroleum based products. You might think of this stock being affected by the double whammy of shipping industry woes (excess supply, low charter rates, etc) as well as the Greek economic problems (that did constrain credit to many Greek companies including shippers). On the positive side, the company is NOT highly leveraged, and is profitable and trades for 7.9 times earnings despite being up 40% in the last year. Good companies caught in the down draft of a bad sector with attractive valuations often turn out to be great investments.

2. Corinthian Colleges Inc (COCO, Mkt Cap: $179.76m, Type: Small Cap)

This private education company stock trades at 0.31 times book value. This might be enough to overcome the fact that the company lost $0.02/share in the last 12 months, although this loss reflects impairment charges taken as the company closed a few of its campuses last year. The company appears to have satisfied the Composite Score requirement from Department of Education this year that will allow it to maintain its credit terms. The year before this it fell below the standard which may be one of the reasons depressing the stock. Projected FY 2015 earnings gives the stock a P/E ratio of just above 8, which should indicate that the earnings power of the company seems to be underappreciated today as well.

3. Skywest Inc (SKYW, Mkt Cap: $738.25m, Type: Small Cap, Dividend)

With 760 airplanes, Skywest is one of the largest operators of regional jet services in US. It operates flights as Delta Connection, United Express, US Airways Express, American Eagle and Alaska. The stock is priced at 0.52 times book value, although in terms of earnings multiple at 12.48, the stock seems to be reasonably priced in its industry. In my opinion, valuing airline assets is not straightforward and it is not possible to come to a reasonably accurate valuation for an investor who looks for stable and reasonably long term investment. The industry is very well supplied with the capacity and operates on thin margins and irrational price wars. Besides, even if Skywest continues to operate well and profitably, the asset values (not the book value, but the real market value of the assets which is what we are all aiming to figure out) will remain volatile if major airlines keep going bankrupt and selling assets. If you do decide that there is sufficient margin to compensate for the risk, you will appreciate a 1.2% dividend for your troubles.

4. Genworth Financial Inc (GNW, Mkt Cap: $6.17B, Type: Mid Cap)

GNW is the largest stock in this list and sports a P/B ratio of 0.42 and a trailing P/E of 14. The company provides financial services including life insurance, wealth management and investment solutions. The insurance sector has performed well recently and the stock has doubled in the last year. With a further 26% growth expected next year, there may be more appreciation to come. There is goodwill and intangibles on the balance sheet and it is better to use the tangible book value metric in your analysis.

5. Swift Energy Company (SFY, Mkt Cap: $512.34m, Type: Small Cap)

Price to book ratio is 0.47. The company explores, develops and operates oil and natural gas properties in Texas and Louisiana and has an estimated proved reserves of 192 million barrels of oil equivalent. Since the book value is quite dependent on the long term price of oil (and gas), part of the investment thesis would depend on your outlook on the future oil and gas prices as well as the product mix. Currently the company is all set to start production in its Eagle Ford shale properties partly funding it through potential sale of its Louisiana assets. As you can expect, this is a capital intensive industry and the leverage is quite high. One expects that as more and more production comes online, the organic cash flow generated will help reduce the leverage and grow earnings. It can be viewed as a little speculative however the value of the assets do provide a great downside protection at these valuations.

6. ALCO Stores Ltd (ALCS, Mkt Cap: $46.10m, Type: Small Cap)

Even with a stock that has doubled in the last 1 year, it still trades at 0.47 times book value. Retail is a tough business to be in, and Alco Stores has been at it for over 100 years. The margins can be quite thin and vary seasonally. Overall, the business is profitable with 15% annual growth expected in the next 5 years. I would generally stay away from broadline retail as it is mostly commoditized so it would be important to dig into any particular competitive advantage Alco might enjoy that will make it a good investment. Going purely by its operating metrics, I fail to see much of a moat, however with businesses like this there is always a possibility of being strategically acquired by a larger competitor. Again, it would depend on what advantage they bring to the table. Still, the stock is relatively cheap on the basis of book value multiple and so a possible investment in the stock is not without merit. When there is a choice between an average business with cheap stock and a great business with an expensive stock, in majority of the cases, an average business with cheap stock turns out to be a better investment.

Remember, these screens work well to bring out a list of stocks that you should dig deeper into. They do not in and itself give you the right stocks as investment merit cannot be determined without knowing more about the company and its business. Any metric or ratio should only be used as one of the indicators, they are often inaccurate at that as any number of business quirks may cause anomalies in the ratios in a given year. These are not yet recommendations at this point.

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