Tuesday, August 5, 2008

* There is Value to be Found in the P/B Ratio

These are the days that value and dividend investors long for. There have been times in the past where I struggled to find stocks worthy of purchasing. Now, the challenge is to pick the best available stocks that will maximize my chances of future success.

When looking for value priced stocks, the Price-To-Book (P/B) ratio is one that I like to focus on. It is calculated as share price divided by book value per share. Book value is most often calculated as Assets less Liabilities. However, some people conservatively calculate book value as Assets less Intangibles less Liabilities. I prefer the latter since it excludes goodwill and other intangibles which would be difficult to recover in a liquidation.

A low P/B ratio could indicate a stock is undervalued. Since GAAP accounting is mostly based on historical cost, a viable growing company will normally be worth more than its book value. However, there are times when good companies will be punished along with the bad. It is our job as investors to separate the good companies from those that have fundamental problems.

Fortunately, online stock screens make searching through a large number of companies quite simple. This MSN stock screen will identify companies in the S&P 500 with a P/B less than 1 and a dividend yield >3% (MSN screen will likely only work in Internet Explorer):
D4L-Cheap Dividend Stocks
- S&p 500 Member
- Current Dividend Yield >= 3%
- Price/Book <= 1
The screen produced 21 stocks on 8/3/2008 when I ran it. Some such as Fannie Mae (FNM) were stocks with obvious fundamental problems and not worthy of additional evaluation. Here are 8 familiar names I pulled from the list:
Company (Symbol), Price/Book, Yield
CBS (CBS), 0.50, 6.76%
Lehman Brothers (LEH), 0.53, 3.65%
Capital One Financial (COF), 0.63, 3.61%
American Capital (ACAS), 0.72, 20.35%
Cincinnati Financial Corp (CINF), 0.83, 5.61%
Amer International Group (AIG) 0.84, 3.29%
SunTrust Banks (STI), 0.85, 7.33%
NiSource Inc (NI), 0.91, 5.49%

This screen is not a buy list, but something to be used to identify stocks that could potentially be a value play. Remember, when stocks go on sale, it is only a good deal when the value you receive is greater than the price you pay!

(Photo: sanja gjenero)

Full Disclosure: Long in ACAS and STI

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