Book value a useful tool for stock picks |
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John Dorfman

Few people pay much attention to a company’s book value when picking stocks. Yet I believe that book value is a neglected and important metric.

A company’s book value is comparable to a household’s net worth. It is simply the sum of a company’s assets minus its liabilities. The figure often is expressed per share of common stock. If book value is $38 a share, for example, and the stock sells for $35, it may well be a bargain.

To be sure, book value can sometimes be misleading. A warehouse full of obsolete modems or ripening bananas may be worth less than a company’s books indicate. A piece of real estate or an oil deposit may be worth more than the stated value.

On balance, though, I find book value a useful tool. From August 1998 to the present, I’ve written 13 columns about stocks that look cheap based on their price-to-book ratios. The column you’re reading is the 14th.

The record

In the past 13 outings, my low price-book selections have averaged a one-year return of 17.8 percent versus 10.1 percent for the Standard & Poor’s 500 Index. The figures are total returns including dividends.

My picks have been profitable nine times out of 13 and have beaten the S&P 500 eight times.

Last year, my brigade of low price-book stocks had mixed results but beat the index. OmniVision Technologies Inc. (OVTI) scored an 81 percent gain, to lead the field. Fresh Del Monte Produce Inc. (FDP) provided a 28 percent return, and Reinsurance Group of America Inc. (RGA) returned 22 percent.

However, my two foreign selections did poorly. Petrobras Argentina SA (PZE) dropped 2.6 percent, and Stealth Gas Inc. (GASS) unraveled with a 34 percent loss.

Averaging my five picks resulted in a gain of 19 percent, compared with 17.3 percent for the index.

Readers should keep in mind that these are “paper portfolios,” so performance is hypothetical. It doesn’t reflect trading costs or taxes. Past performance doesn’t guarantee future results. And the returns for my column selections shouldn’t be confused with results I obtain for clients.

Of the 3,319 stocks traded in the United States with a market value of $250 or more, 332 sell for less than book value. Some, of course, are heavily in debt, or gasping for air. Here are four that look attractive to me now:

American International Group

American International Group (AIG) looks compelling. Yes, I’m talking about the controversial — some would say disgraced — New York-based insurance company that played a role in the financial crisis of 2007-09 and had to be bailed out by the federal government.

I was never an admirer of Hank Greenberg, AIG’s longtime CEO. I thought he was arrogant and tricky, traits that in my opinion played into AIG’s downfall through the issuance of credit default instruments. But now Mr. Greenberg is gone, and so are those toxic derivatives.

What’s left is a solid worldwide insurance company that earned $9 billion last year on revenue of more than $68 billion. The stock sells for nine times earnings and 0.7 times book value.

Formula Systems

In early 2000 when investors were in love with all things tech, Formula Systems Ltd. (FORTY) sold for $82 a share. In the depths of the bear market in early 2009, it sold for barely $4. Today, the shares are at just under $25.

The company, based in Or Yehuda, Israel, offers information technology consulting services; one of its divisions specializes in serving the insurance industry. Earnings have been inconsistent, but revenue and earnings hit a record last year.

At three times earnings and 0.9 times book value, I consider Formula Systems a bargain, and I own it for a couple of clients.

Unum Group

Unum Group (UNM), based in Chattanooga, Tenn., is a leading seller of individual and group disability insurance. For decades, disability claims have gone up during recessions, and the recent economic downturn was no exception.

It was a double whammy because sales of new policies decline when the economy is bad. But now, with the nation in what looks to me like a durable economic recovery, Unum is doing better.

The stock sells for nine times earnings and 0.9 times book value. I think it looks like a good bet.

Travel Centers of America

Travel Centers of America LLC (TA), with headquarters in Westlake, Ohio, provides truck repairs, offers fuel for cars and trucks, and runs a variety of restaurants along interstate highways. The restaurants include Iron Skillet, Country Pride, Arby’s, Dunkin’ Donuts, Taco Bell and others.

With gas prices on the decline and the economy on an upswing, the stock may be timely now. It is certainly inexpensive, at eight times earnings and 0.8 times book.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston. He can be reached at [email protected].

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