The First Cut: Low Price-to-Book Firms
by John Bajkowski
While the market does a good job of valuing securities in the long run, in the short run it can overreact to information and push prices away from their true worth. The book value of a company measures the net worth of the firms assets (shareholders equity) and is equal to total assets less liabilities. It represents the value of the owners equity based upon the historical accounting activities. Value investors such as Benjamin Graham sought the rare companies with a share price below their book value. Numerous academic studies also identify the price-to-book-value ratio as being one of the best measures to identify undervalued and neglected stocks.
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The First Cut stocks in this issue are non-financial, exchanged-listed stocks with price-to-book-value ratios among the lowest 10% of all stocks. Financial-related companies are excluded because their balance sheets are not directly comparable to other sectors. Additional filters exclude foreign companies, stocks with prices below $5 per share, companies with a market capitalization below $20 million, and companies with negative earnings in the most recent year.
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