Warren Buffett (Trades, Portfolio), widely considered the world’s greatest investor, pays himself hardly any salary. But his net worth, comprised chiefly of shares in his company Berkshire Hathaway, is about $65 billion by Forbes magazine’s estimate.
Attempting to assess what Buffett is worth by looking only at his income would be silly. Yet many investors, in evaluating a stock, look only at earnings (the equivalent of income) and ignore a company’s book value (its net worth per share).
I believe the ratio of a stock’s price to the company’s book value – the price/book ratio, for short – is a very telling figure.
On that basis, I recommend a handful of stocks this week. The best known are Prudential Financial Inc. (PRU, Financial) and Kelly Services Inc. KELYA). Each is selling for less than the company’s book value.
The Record
This is the 16th column I’ve written recommending stocks with low price/book ratios. The previous columns were published in 1998 through 2015, with the exception of 2007-2009.
Those 15 sets of recommendations have averaged a 17.8% total return over 12 months. That compares with a 9.2% average return for the Standard & Poor’s 500 index over the same periods.
Eleven of the 15 columns were profitable, and 10 beat the S&P 500.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Past performance doesn’t predict future results. And the returns on my column selections shouldn’t be confused with my performance in managing client accounts.
Last year’s recommendations did well. They notched a 15.1% return, compared to 2.3% for the S&P 500 from November 10, 2015 through November 4, 2016. The best performer was Endurance Specialty Holdings Ltd. (ENH), up 40.8%. (Following the big advance, I think it’s fairly valued and don’t recommend it.)
The worst performer was Vodaphone Group PLC (VOD), down 15.8%. In between were Benchmark Electronics Inc. (BHE), up 24.8%, Tutor Perini Corp. (TPC), up 16.6%, and American National Insurance Co. (ANAT), up 9.0%.
Here are five new recommendations of stocks that look attractive to me based on book value.
Prudential
Owning “a piece of the rock” hasn’t been a good thing for stockholders in Prudential Financial Inc. (PRU, Financial) in recent years. Shares of the big insurer touched $100 in 2007, before the financial crisis, and haven’t regained that height since. They sell now for about $86.
That price is only 0.68 times book value. If interest rates rise in the next 2-3 years (as I exp0ect) it will be good for Prudential and other insurers, since they typically invest their float (money they get in premiums that may not be paid out in claims for several years).
AV Homes
AV Homes Inc. (AVHI, Financial) is a small, rapidly growing homebuilder based in Scottsdale, Arizona, that specializes in developments for people age 55 and older. It builds homes and conducts other real-estate activities in Arizona, Florida and the Carolinas.
After a 7-year string of losses starting in 2008, AV Homes returned to profitability last year and has been gathering steam this year. The stock goes for 0.84 times book value.
Kelly Services
Based in Troy, Michigan, Kelly Services Inc. (KELYA, Financial) is a nationwide employment agency and temporary-help company. Traditionally in economic recoveries, employers start to hire permanent employees and desist from using temps. That’s one reason why Kelly now sells for only 0.76 times book.
So neglected is this stock that only one Wall Street analyst follows it, so far as I know. At today’s price of about $19 a share, I consider Kelly attractively valued.
Atwood Oceanics
One of the lowest price/book ratios you’ll find anywhere belongs to Atwood Oceanics Inc. (ATW, Financial), which trades at 0.14 times book value. As the energy industry collapsed in the past two and a half years, Atwood managed to stay profitable, but analysts expect it to post a loss in 2017.
There is absolutely nothing timely about this stock. Yet it’s so cheap that I think it will reward patient holders.
Roadrunner Transportation
I’ll conclude with Roadrunner Transportation Systems Inc. (RRTS, Financial), a small trucking and logistics company based in Cudahy, Wisconsin. My guess is that the U.S. economy will be peppier in the next two years than the consensus expects, and that oil prices will stay in the $40-to-$70 range.
Both of those developments would be favorable to trucking companies. This company has been expanding rapidly of late, and its stock sells for only 0.47 times book value.
Disclosure: One of my clients owns shares in Tutor Perini. I have no positions in the other stocks discussed in this week’s column, and no plans to initiate positions in the next three days.
