4. Low price to book value.
Book value, a company's assets per share less its liabilities per share, has been found also to be a profitable source of stock valuation. The ratio of price to book value, sometimes shortened to price to book or P/Bk, can suggest how great a bargain a stock is or the opposite. Low price to earnings is a similar measure, but earnings can be more easily fudged. There are generations' worth of research into results for low vs. high price to book value stocks. Enough info is out there that one can probably be safe simply buying low P/Bk assets, compared with average or high price to book stocks, and reliably gain better results accordingly. Often people do not find this to be true. The trick, though, may be first to select for low leverage stocks (those with little debt to equity, for instance, up to D/E of about 0.25) and then to know when to sell a stock bought for its good low P/Bk credentials (i.e. once its price to book value has risen to better than 1.0).
The Tweedy Brown and Company research, though, is clear: low P/Bk kicks butt. In a characteristic study, low price to book value stocks in the S&P 500 Index were compared with the S&P 500 Index itself over the difficult period from April 30,1970 to April 30,1981, a time which included arguably the worst post-World War II market meltdown till 2008. Stocks with P/Bk 0.5 and below provided average annual returns of 20% or better, while the S&P 500 Index averaged only single digit yearly returns. This measure of value is reliable enough, in my view, that when there are few un-leveraged low P/Bk stocks available from which to choose, as is the case these days, it is a sign that the market as a whole has gotten ahead of itself. We may then not be at the end of the game or even quite into the 9th inning, but savvy folks are starting to get restless and are looking toward the exits.
Despite this, I did find 3 stocks in this category that appear worth some of our investment dollars:
Low Price to Book Value Stocks
|Kelly Services, Inc.||KELYA||$16.47||0.74|
|Petrobras Argentina, S.A.||PZE||$4.85||0.64|
|TransGlobe Energy Corp.||TGA||$3.26||0.44|