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Stock Screen: Widest Discount from Book Value - May 30, 2012
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.
Citigroup (C), also commonly referred to as Citi, is a diversified financial services provider with operations in consumer and corporate banking, insurance, investment banking, and asset management. Businesses include Citibank, CitiFinancial, Primerica Financial Services, and Banamex. It is one of the largest financial services institutions around the world with more than 200 million customer accounts in about 160 countries and jurisdictions.
The stock currently trades at roughly half its book value. Investors seemingly remain wary of the company’s Citi Holdings subsidiary, which was formed following the financial crisis in 2008 and consists of assets that are earmarked to be unloaded after being rocked by the sub-prime fiasco a few years back. Although analyst Sharif Abdou believes that this business is making headway, he thinks the portfolio remains filled with highly toxic assets that will probably take years to remove. Indeed, he thinks that the book value of assets is somewhat inflated, and masks a trove of poor investments still on the balance sheet. Meanwhile, he has some concern about the company’s exposure to financially challenged European markets.
But, while Abdou thinks it is far-fetched that Citigroup will be able to return to its glory days, he does feel that there could be some long-term value here for those willing to take a chance. True, the stock scores low marks for nearly every Safety indicator, however, a growing footprint in Asia and Latin America may well drive healthy gains out to mid-decade.
Nabors Industries (NBR) is the world’s largest land drilling contractor. It markets roughly 500 land drilling and more than 750 land workover rigs and has an offshore fleet consisting of 39 platform rigs, 12, jackups, and 4 barge rigs. The company provides several related oilfield services and has interests in crude oil and natural gas projects.
The company seems to have found its mark. Earnings improved handsomely in the first quarter, with robust oil-related drilling more than offsetting weak natural gas pressure pumping activity. Analyst Robert Mitkowski Jr. looks for momentum to continue to build, with recent fleet utilizations auguring well for work in oil-producing basins stateside. Plus, he feels that offshore and overseas drilling could be in store for an extended upturn.
Still, largely due to excess natural gas reserves in the United States, market sentiment for Nabors’ stock has been decidedly negative. Its steep discount to tangible book value suggests rig counts nationwide will continue to decline markedly in the months ahead. Based on recent results, we are optimistic that oil drilling activity will help offset declines in natural gas.
Too, the 37% fall in the share price over the past three months may have been partly driven by declining prices for crude oil (texas west intermediate and brent) due to assumptions of a slowing global economy. We point out, however, that capital project budgets at many major energy companies have been improving, which has a much more direct impact on Nabors’ top line than the price of oil. Meanwhile, restructuring is likely to lead to better efficiency. In all, we believe the stock’s discount to its tangible book value may signal a favorable entry point for venturesome investors.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.