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November, 2004


In an 11/02 investment essay, A Basket of Low Price to Book Bargains, I focused on one of the staples of Benjamin Graham value stocks, those with low price in relation to book value. Each of five stocks recommended then had: a per share book value at least 50% greater than its price; reasonable price to earnings ratios (12 or below); low debt to equity (.33 or lower); a price $5 or above; and a dividend payout ratio (if the stock had a dividend) of .5 or below.

One of Ben Graham's rules for average investors was that they sell value assets within two years. He believed that, in general, bargain holdings would have realized much of their appreciation potential in that period of time.

So, how have the recommended low price to book stocks done, assuming an equal investment in each, a purchase on 11/21/02, and a sale on 11/17/04?

The basket is up 55% in that time (two losers and three gainers, with the largest loss, -37%, and the greatest gain, +139% [USAP, which went from $5.86 to $14.00]). This represents a compound annual appreciation of 24.5%. By comparison, in the same 11/21/02-11/17/04 period, the S&P 500 Index is up 27%, which works out to a compound average annual appreciation of 12.7%.

Today, the overall equity market is significantly higher than in late 2002. There are fewer excellent bargains available. As a result, to obtain a potential portfolio like the one suggested then, I have had to accept somewhat higher price to book ratios. The values in the new portfolio are not quite as good (average book value 40% above the average share price), and so the appreciation is not likely to have as positive a result as with the earlier stocks. Still, the value of the new portfolio is substantially more favorable than that for the market overall. Thus, I'd be surprised if in the next couple years the new securities do not beat the S&P 500 Index once again. However, as always, past results do not guarantee future returns.

Here, then, are five more, apparently excellent, Ben Graham price to book value bargains:

Arch Capital Group, Ltd.ACGL$38.45.6390%N.A.0.14
Duckwall-Alco Stores, Inc.DUCK$17.00.68120%N.A.0.13
M&F Worldwide Corp.MFW$13.08.77120%N.A.0.06
National Western Life InsuranceNWLIA$156.20.7490%N.A.0.00
Vulcan International Corp.VUL$44.00.7811.45%9%0.00


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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