Copyright Forbes
A classic stock-picking technique that has fallen into disuse is the price-to-book value ratio. Ben Graham, widely considered the father of value investing, liked stocks selling “below book.” I still do, although they are rarer today than they were in Graham’s Day. Book value is a company’s net worth – its assets minus its liabilities – usually expressed per share of common stock. The price-to-book ratio is a company’s stock price divided by its book value. Annually, I publish a set of recommendations on companies selling at an attractive price-to-book ratio. I like 2.0 or less, and love 1.0 or less. Here are five new picks. Conagra You may not recognize the name of Conagra Brands Inc. (CAG) but you certainly know some of its brands: Banquet, Birds Eye, Chef Boyardee, Duncan Hines, Healthy Choice, Hunt’s, Marie Callender’s, Orville Redenbacher, Reddi-wip, Slim Jim, Vlasic and Wish-Bone. It's a tough environment these days for packaged-food companies. The cost of their raw materials is up. With the economy slowing, consumers are cutting back or looking for cheaper alternatives. Conagra’s debt is near the top of the range I usually find acceptable. But I think the company has staying power because of that batch of famous brands. At 0.92 times book value, it’s a bargain in my judgment. Beazer Homes High mortgage rates have hobbled home sales last year and this year. But I believe there is lots of pent-up demand for houses, and one beneficiary could be Beazer Homes USA Inc., which sells for only 0.54 times book value – one of the cheapest valuations around. Beazer is a smallish stock, with a market value of $652 million. (I classify over $10 billion as large, under $1 billion as small.) Only five Wall Street analysts deign to cover it. But of those five, four recommend it. The company’s debt is on the high-side of my preferred range. But over the past ten years, it has improved it debt-to-equity ratio considerably. United Fire Slightly larger, but still in small-stock territory, is United Fire Group Inc. (UFCS). Based in Cedar Rapids, Iowa, it sells property-and-casualty insurance in all 50 states. Wall Street has barely heard of it. Only three analysts cover it and only one recommends it. At about $35, the stock sells for exactly book value. Apparently, that’s an attractive price to some insiders. Two directors have added a bit to their holdings this year, as has Eric Martin, the chief financial officer. Reinsurance Group Based in Chesterfield, Missouri, Reinsurance Group of American Inc. (RGA) is one of the larger reinsurance companies in the world, and the largest in the United States. For most reinsurers, profits depend in large part on the frequency and severity of earthquakes, hurricanes and tornados. That’s less so with RGA, since it concentrates on reinsuring life insurers and health insurers. Its stock sells for about $235 a share, but it has about $70 a share in cash, so investors are paying about $165 a share for the operating business The company has reported a profit in each of the past 30 years. The stock sells for just under book. Citizens Financial Finally, I will bring back one of my choices from last year, Citizens Financial Group Inc. (CFG). It’s a bank based in Providence Rhode Island, serving customers in 14 states with about 1,100 offices. Profitability at Citizens has often been mediocre in the past. But it has grown its profits 10.5% in the past four quarters, reduced its number of shares outstanding, and improved its debt ratios. The stock sells of 0.94 times book. Performance Beginning in 1998, I’ve written 25 columns about stocks with attractive price-to-book ratios. (Today’s is the 26th.) The average one-year return on my picks has been 18.3%, outdistancing the 13.0% average for the Standard & Poor’s 500 Total Return Index. Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future. My low-price-to-book selections have been profitable 17 times out of 25, and beaten the index 16 times. Last year was not one of those times. My choices did terribly, declining 14.0% while the S&P returned 13.6%. Three of my four picks fell. The worst loser was Kelly Services Inc. (KELYA), down 39%. G-III Apparel Group Ltd (GIII) and Molson Coors Beverage Co. (TAP) also declined. My only winner was Citizens Financial, up 15%. Despite the bad result in the past 12 months, I still have a lot of faith in this stock-picking method. Disclosure: I don’t own the stocks discussed in today’s column personally or for clients.
