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Stock Screen: Widest Discount from Book Value - July 15, 2011
A company’s book value is derived by summing up all of its assets and subtracting all its liabilities. This is, arguably, what would be left after a total liquidation of the company. Some investors focus on book value when investing because it is an accounting look at what one is buying without the bias of investor sentiment. To this end, it is as close as one can get to a pure picture of what a company is worth, keeping in mind, of course, that accounting isn’t exactly a pure science.
Generally speaking, a stock trading near or below book value is of the most interest, since such a company can be bought for close to or, better yet, less than what it is “worth”— at least by one measure. Clearly, investors looking at this largely value-oriented metric prefer buying a dollar of assets for less than a dollar.
It may seem odd to suggest that this is even possible, since efficient markets theory dictates that arbitrage investors should quickly move in and bid up prices to the point where there is no longer a discount to book value. However, many of the companies that trade close to or below book value trade at such low valuation levels for a reason. Moreover, the total liquidation of a company isn’t a simple undertaking, so that quick money is far from assured. Thus, investors need to carefully research such companies and make sure that any risks are fully understood before investing.
To help value-oriented investors find companies that are trading near or below book value, a weekly screen listing such companies is included in the Summary & Index section of The Value Line Investment Survey. The screen shows the 100 companies with the widest discount to book value and includes Value Line’s proprietary Timeliness and Safety ranks, as well as recent price, book value per share, the percentage discount to book value, Beta, P/E, and dividend yield. Basically, that is everything one needs to start the research process.
Below are some of the more interesting investment candidates from the list. Subscribers can access the entire list by clicking here.
Hartford Financial Services Group Inc.
Hartford Financial Services Group (HIG) is one of the leading providers of property/casualty insurance in the United States. It offers individual life and annuities, asset management services, and employee benefits programs. And, its life insurance operations rank among the fastest growing based on increases in assets. In 2010, net income was broken down as follows: Commercial (P&C Commercial and Group Benefits), 54.4%; Consumer P&C, 6.6%; Wealth Management (Life Insurance, Global Annuities, Retirement, and Mutual Funds), 39.0%.
The financial services concern got off to a strong start in 2011. During the March quarter, earnings skyrocketed more than eightfold. However, severe U.S. catastrophe activity, the cost of asbestos litigation, and a difficult macroeconomic environment likely slowed its momentum in the second quarter. Plus, the company may record charges for a discontinued software project and the sale of the Federal Trust Corp. during the interim. Consequently, in mid-July, management lowered its June-period guidance. At the time of the revised outlook, the shares stumbled slightly, but they may react more severely when the company posts earnings in early August — especially if it fails to meet its lowered target.
Teekay Corp. (TK) is an energy transportation company. It manages 139 vessels (114 of which it owns) carrying crude oil, petroleum products, and liquefied natural gas (LNG). The company also offers offshore services. It mainly serves oil companies, traders, and government agencies. It also operates a wholly-owned subsidiary, Petrojarl (floating vessels used for the processing of hydrocarbons and for storing oil) and is the minority partner in Teekay LNG Partners, Teekay Offshore Partners, and Teekay Tankers. The parent company possesses certain marketing and asset purchasing advantages, which has helped its minor partners.
The company has benefited from the growing roster of offshore energy projects. Indeed, we anticipate that the improved outlook for liquefied gas carriers will augur well for the transporter. Even so, conventional crude oil tankers have had a difficult run over the past few months (mainly due to the troubles in Libya), and spot rates may continue to waver in the coming quarters. As such, we imagine that market, and TK’s totals, will post a better rebound next year.
Beyond the discount to book value, this stock may also tempt income-oriented accounts. The company has used available resources to invest in its business and to reward its shareholders. It has raised its annual payout each year, since 2002. Although we have a somewhat more conservative outlook for its distributions this year and next, the issue still offers investors an attractive yield.
Sony Corporation (SNE) and its subsidiaries develop, design, manufacture, and sell various kinds of electronic equipment, instruments, and devices for consumer, professional and industrial markets, as well as game consoles and software. It also creates and distributes image-based software, including motion picture, home entertainment and television products; and produces and distributes music recordings. Sony also has a financial services business, including life and non-life insurance operations through its Japanese insurance subsidiaries and banking operations through a Japanese Internet-based bank. In addition to the above, Sony is engaged in a network services business and an advertising agency business in Japan. Geographically, Japan accounted for 30.0% of operating revenues; the U.S, for 20.1%; Europe, for 20.4%; the Asia-Pacific region, for 17.9%, and other regions, for 11.6%.
The company, one of Japan’s largest exporters, has struggled at the hands of a wavering economic climate of late. Indeed, yen-related headwinds will likely continue to weigh on its export margins. In addition, the tsunami that rocked the northern part of the country last March disrupted production at several of Sony’s facilities. It may well take some time for the company to recover from that tragedy.
Nevertheless, we look forward to the company’s ability to rebound over the next few years. A restructuring of the supply chain and growth in emerging markets should help boost the ailing television segment. Ongoing product innovations (especially in its gaming division) should help pave the way moving forward. Likewise, Sony may focus on higher-margined software products that could bolster its overall profitability. As such, patient investors may want to take a closer look here.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.