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 market 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 is one of the more interesting investment candidates from the list, Ferro Corp. (FOE). Subscribers can access the entire list by clicking here.

Ferro Corporation

Ferro is a leading producer of specialty materials and chemicals that are sold to manufacturers who, in turn, make end products. Its 40 global manufacturing facilities generate the following types of products:  



Electronic, Color and Glass Materials — Conductive metal pastes and powders, polishing materials, glazes, enamels, pigments, decoration colors, and other performance materials; and



Polymer and Ceramic Engineered Materials — Polymer additives, engineered plastic compounds, pigment dispersions, glazes, frits, porcelain enamel, pigments, and high-potency pharmaceutical active ingredients.

The company’s products are used in a variety of applications including:    


•  Appliances


•  Industrial products

•  Automobiles


•  Packaging

•  Building and renovation


•  Pharmaceuticals

•  Electronics


•  Photovoltaic products

•  Household furnishings


Many products are used as coatings on customers’ goods, such as glazes and decorations on tile, glass and dinnerware. Other offerings are applied as pastes in products such as solar cells and other electronic components. Often, FOE’s chemicals are a small portion of the end product’s total cost, but they can be critical to its appearance or functionality.

Its leading customers include manufacturers of ceramic tile, major appliances, construction materials, automobile parts, glass, bottles, vinyl flooring and wall coverings, solar cells, and pharmaceuticals. Its customer base is well diversified both geographically and by end market. The company also helps customers run cost-effectively through material specification and evaluation, product design, and manufacturing.

Ferro’s recent performance explains why it made our list of companies trading below book value. Sales declined across the board, with the most pronounced decrease occurring in the Electronic Materials unit, where weakness in solar markets has reduced demand for conductive pastes used in solar applications. Other segments have been affected by lackluster demand in Southern Europe and unfavorable exchange rate fluctuations. This, along with generally poor demand for computers and consumer electronics, caused management to reduce its earnings outlook significantly.

The shares took a hit following the weak results. Since then, they have rebounded somewhat but are still nearly 50% lower than their 52-week high.

Importantly, there has not been any evidence of market share losses or unsatisfactory execution. Although it is difficult to predict when a recovery will take place in Europe, Value Line analyst Steven Shnayder expects earnings to grow next year. The company is making aggressive cost cuts and undergoing restructuring in Europe. Also, we expect an improved product mix to benefit the bottom line.

Despite the company’s above average long-term recovery prospects, these shares receive poor marks for Timeliness, Safety, and Stock Price Stability, and should only be considered by risk-tolerant investors.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.