The First Cut: Low Price-to-Book Firms

    by John Bajkowski

    The First Cut: Low Price To Book Firms Splash image

    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 firm’s assets (shareholder’s 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.

    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.

    The table lists the historical price-to-book-value figures, along with the current industry value for comparison. The price-earnings ratios for these companies are all over the board and highlight how short-term earnings disruptions can make earnings-based evaluations difficult. The historical sales and earnings growth rates measure long-term trends. The market-cap column highlights how most extremely low price-to-book firms tend to be very small companies. The 52-week relative strength rank column reveals that these stocks have not been the recent darlings of Wall Street—and that is exactly where the contrarian investor begins their analysis.

    —John Bajkowski
    AAII Vice President, Senior Financial Analyst


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