People can argue all day about whether book value is a good measure of a stock’s value.
I say so, and I think the results of this column seem to prove it. Book value is a company’s net worth – the sum of its assets less its liabilities. It’s usually expressed per share — that’s the total dollar amount divided by the number of shares outstanding.
Today is the 22ndnd Column I wrote about stocks selling for less than book value. The average annual return for the first 21 columns was 16.6%.
I take that back at any time. It compares well to the Standard & Poor’s 500 Total Return Index average one-year return for the same 21 periods, which was 10.4%. Of the 21 sets of low-price-to-book picks, 15 were profitable and 14 beat the S&P 500.
Last year I had to balance big wins and losses. Dorian LPG (LPG) returned 105% but Argonaut Gold (ARNGF) lost 88%. Graham Holdings
Keep in mind that my column results are hypothetical and should not be confused with results I get for clients. Also, past performance does not predict the future.
Here are my new choices among stocks selling below book value. I start with capital one
, a banking corporation based in McLean, Virginia. It is the 10th largest bank in the US by assets. You may know it from TV commercials with the slogan “What’s in Your Wallet?”
Compared to most banks, Capital One places much more emphasis on credit card lending. It is also engaged in auto loans and commercial loans. For brick-and-mortar branches and mortgage loans, it’s relatively low. Some of its branches are cafes.
The stock is cheap, selling for about five times earnings and just under book value. A lot of people think a recession is coming; Therefore, they are not willing to pay for a bank with heavy credit card charges.
Aside from being cheap, I like Capital One’s historical growth rate — about 7% per year for revenue and earnings over the past decade.
Kelly Services (KELYA), based in Troy, Michigan, is one of the larger recruitment firms in the US (it recently ranked fourth in the industry according to Statista). Its shares are selling for 0.53 times book value and 12 times earnings.
Kelly’s profitability was disappointing. It’s lost money in three of the last 15 years and hasn’t had a single year that I’d call great. However, I think things are likely to improve. Nowadays you read a lot about companies struggling to find qualified employees.
So it seems to me that this should be a good time for staffing agencies. After not reporting any revenue growth for the past decade, Kelly grew its revenue by about 7% over the past year. That is a beginning.
A nearly debt-free choice is Fulfilling genetics (FLGT). Based in Temple City, California, the company performs genetic testing for doctors and hospitals. It branched out into conducting Covid-19 testing, and revenue from that source soon eclipsed its core business. Now the income from Covid tests is ebbing away.
That’s why the stock is so cheap, selling for just 0.9 times book value and less than five times earnings.
Core (non-Covid) revenues are rising, although small. And the company has $571 million in cash and marketable securities. At the current price (around $39 per share), I think Fulgent is attractive.
It was recently listed on my crash list, which includes stocks that took a hit over the last quarter that I think can recover and thrive.
boxes, anyone? West Rock
, of Atlanta, is one of the country’s largest manufacturers of packaging such as corrugated boxes and folding boxes. As people buy more and more of their goods online, the need for shipping containers will continue to grow.
I’ve had this issue occasionally through Packaging Corp. of America (PKG), but the reasoning is similar to WestRock. The former is more profitable but is selling for three times book value, while WestRock is selling for 0.84 times book value.
Of course, companies that sell below book value are cheap for a reason. You have problems and everyone knows it. But that’s not necessarily a bad thing in the stock market. It’s often better to buy a cheap stock with tangible problems than an expensive stock with hidden ones.
Disclosure: One or more of my customers own Packaging Corp stock. of America.