Grow Embedded Value

Posted on by David Merkel

One of my rules of thumb in equity investing is that if I buy companies trading below tangible book value,? with earnings yields over 10%, it is difficult to lose value, and the odds favor gaining value.

But there are some caveats:

  • Analyze the balance sheet, highly indebted companies are not to be trusted, but that varies by industry.
  • Longer dated assets, like property, plant & equipment should be discounted.
  • Banks and REITs must be scrutinized carefully, because of their weak liability structures.
  • Foreign companies need extra scrutiny, because the disclosures are often not as good.? This goes triple for Chinese companies.
  • Make sure you are not investing in a “buggy whip” industry, particularly in the era of the internet.? How can your company be disrupted?

The idea is a simple one.? Buy companies below their tangible book value when they have good earnings, and good earnings prospects. Over a long enough period of time, the growth in tangible book value will help drive growth in the stock price.

For companies with over $100 million in market capitalization, here are the companies that fit this description:

company ticker img_desc country exchg_desc P / TB P / E Expected P/E Mkt cap LT Debt/ Equity
AerCap Holdings N.V. AER 0939 – Rental & Leasing Netherlands N – New York

0.66

7.6

5.2

1524.4

263.6
Aircastle Limited AYR 0939 – Rental & Leasing United States N – New York

0.64

8.4

8.1

931.2

202.1
American International Group, AIG 0715 – Insurance (Property & Casualty) United States N – New York

0.55

2.9

9.8

56637

73.6
Anworth Mortgage Asset Corpora ANH 0933 – Real Estate Operations United States N – New York

0.94

7.8

7.9

917.8

3.8
Assurant, Inc. AIZ 0709 – Insurance (Life) United States N – New York

0.74

5.7

6

2992.7

19.6
AXA (ADR) AXAHY 0709 – Insurance (Life) France O – Over the counter

0.88

7.6

5.8

29204.3

21.5
Axis Capital Holdings Limited AXS 0715 – Insurance (Property & Casualty) Bermuda N – New York

0.86

8.3

8.8

4325.9

19.3
AXT, Inc. AXTI 1033 – Semiconductors United States M – Nasdaq

0.94

7.5

9.9

129

2.8
Banco Bilbao Vizcaya Argentari BBVA 0724 – Money Center Banks Spain N – New York

0.9

8.7

6

34554.8

250.4
Barclays PLC (ADR) BCS 0727 – Regional Banks United Kingdom N – New York

0.42

6.9

3.6

31291.9

44.7
Callon Petroleum Company CPE 0609 – Oil & Gas Operations United States N – New York

0.86

1.7

5.8

171.6

62.6
Chimera Investment Corporation CIM 0703 – Consumer Financial Services United States N – New York

0.73

4.6

5.3

2434.6

59.2
China Gerui Adv Mtals Grp Ltd CHOP 0121 – Iron & Steel China M – Nasdaq

0.55

2.3

1.7

157.4

0
China Zenix Auto International ZX 0415 – Auto & Truck Parts China N – New York

0.49

1.8

1.4

127.3

0
Citigroup Inc. C 0724 – Money Center Banks United States N – New York

0.53

7.4

5.8

77291.7

165.3
Corning Incorporated GLW 1024 – Electronic Instruments & Controls United States N – New York

0.95

8

8.4

19410

14.7
Crexus Investment Corp CXS 0933 – Real Estate Operations United States N – New York

0.85

6.6

9.4

779.2

0
Deutsche Bank AG (USA) DB 0727 – Regional Banks Germany N – New York

0.65

7.6

4.7

31543.1

318.7
GeoEye Inc. GEOY 0909 – Business Services United States M – Nasdaq

0.8

7.3

8.7

358.5

97.6
Hardinge Inc. HDNG 0218 – Misc. Capital Goods United States M – Nasdaq

0.74

8

7.4

105.1

4.3
Homex Development Corp. (ADR) HXM 0215 – Construction Services Mexico N – New York

0.91

8.6

5.5

846.4

85.4
Ingles Markets, Incorporated IMKTA 0957 – Retail (Grocery) United States M – Nasdaq

0.91

9.9

8.2

400

183.1
Ingram Micro Inc. IM 1006 – Computer Hardware United States N – New York

0.77

9.6

7.6

2591.2

8.7
Jinpan International Limited JST 1024 – Electronic Instruments & Controls China M – Nasdaq

0.85

5.3

4.7

132

0.8
Kelly Services, Inc. KELYA 0909 – Business Services United States M – Nasdaq

0.77

6.4

7.4

462.9

0
KeyCorp KEY 0727 – Regional Banks United States N – New York

0.83

8.4

9.5

7339.2

90.7
KKR Financial Holdings LLC KFN 0718 – Investment Services United States N – New York

0.89

5.1

4.7

1557.4

0
Knightsbridge Tankers Limited VLCCF 1118 – Water Transportation Bermuda M – Nasdaq

0.61

6.9

9.4

215.2

42
KT Corporation (ADR) KT 0915 – Communications Services South Korea N – New York

0.89

9

7

7041.3

72.6
Le Gaga Holdings Ltd ADR GAGA 0509 – Crops Hong Kong M – Nasdaq

0.89

8.1

4.1

200.3

5.3
Lihua International Inc LIWA 0127 – Misc. Fabricated Products China M – Nasdaq

0.7

3.1

2.1

161.3

0
LUKOIL (ADR) LUKOY 0606 – Oil & Gas – Integrated Russia O – Over the counter

0.68

4.2

4

47753.8

10.4
Mechel OAO (ADR) MTL 0124 – Metal Mining Russia N – New York

0.8

4.6

3.5

3322.6

139.6
Metlife Inc MET 0709 – Insurance (Life) United States N – New York

0.69

5.7

5.4

32402.5

45.3
Mizuho Financial Group Inc. (A MFG 0727 – Regional Banks Japan N – New York

0.9

3.5

8.5

40165.5

236.3
Navios Maritime Holdings Inc. NM 1118 – Water Transportation Greece N – New York

0.53

4.6

7.6

350.3

131.3
Newfield Exploration Co. NFX 0609 – Oil & Gas Operations United States N – New York

0.98

5.9

8.8

3943.1

72.2
Olympic Steel, Inc. ZEUS 0127 – Misc. Fabricated Products United States M – Nasdaq

0.86

8.8

6.4

181.8

95.4
Orbotech Ltd. ORBK 1033 – Semiconductors Israel M – Nasdaq

0.78

6.3

9.7

329.7

13.1
Patterson-UTI Energy, Inc. PTEN 0612 – Oil Well Services & Equipment United States M – Nasdaq

0.93

6.6

8.3

2276.5

18.7
Petroleo Brasileiro SA (ADR) PBR 0606 – Oil & Gas – Integrated Brazil N – New York

0.9

6.8

6.3

126006.1

43.5
Phoenix Companies, Inc., The PNX 0709 – Insurance (Life) United States N – New York

0.21

3.6

3.7

203.5

45
Popular, Inc. BPOP 0727 – Regional Banks Puerto Rico M – Nasdaq

0.52

8.9

6.1

1664

47.1
Protective Life Corp. PL 0709 – Insurance (Life) United States N – New York

0.7

7.2

8

2557

53
Reinsurance Group of America I RGA 0706 – Insurance (Accident & Health) United States N – New York

0.68

7.8

7.2

4059.3

34.9
Republic Bancorp, Inc. KY RBCAA 0727 – Regional Banks United States M – Nasdaq

0.94

4.7

8.7

489.6

7.7
REX American Resources Corp REX 0103 – Chemical Manufacturing United States N – New York

0.65

7.8

6.8

163.9

41
Royal Caribbean Cruises Ltd. RCL 1118 – Water Transportation United States N – New York

0.71

9.7

9.5

5542.1

91.9
Societe Generale SA (ADR) SCGLY 0724 – Money Center Banks France O – Over the counter

0.29

5.8

3.8

16945.2

20.7
StanCorp Financial Group, Inc. SFG 0706 – Insurance (Accident & Health) United States N – New York

0.84

2.5

8.7

1676.1

14.8
StealthGas Inc. GASS 1118 – Water Transportation Greece M – Nasdaq

0.38

8.5

5

122.1

98.5
Symetra Financial Corporation SYA 0709 – Insurance (Life) United States N – New York

0.47

7.8

8.5

1494.6

0
Tech Data Corp TECD 1006 – Computer Hardware United States M – Nasdaq

0.96

9.8

8

1918.9

2.9
Ternium S.A. (ADR) TX 0121 – Iron & Steel Luxembourg N – New York

0.81

8.3

5.8

3993.4

26.2
Thompson Creek Metals Company, TC 0124 – Metal Mining United States N – New York

0.33

3.5

5.7

563.9

20.8
Transportadora de Gas del Sur TGS 0609 – Oil & Gas Operations Argentina N – New York

0.43

5.6

7.5

191.7

80.6
TravelCenters of America LLC TA 0963 – Retail (Specialty Non-Apparel) United States A – American

0.51

4

3.7

145

31.9
Triple-S Management Corp. GTS 0806 – Healthcare Facilities Puerto Rico N – New York

0.76

9.4

8.6

510.6

18.2
Unit Corporation UNT 0612 – Oil Well Services & Equipment United States N – New York

0.94

8.7

9

1819.7

15.8
Valero Energy Corporation VLO 0609 – Oil & Gas Operations United States N – New York

0.86

9.1

5.6

13578.5

40.5
Vishay Intertechnology VSH 1033 – Semiconductors United States N – New York

0.97

7.7

7.1

1433.8

23.4
Woori Finance Holdings Co., Lt WF 0727 – Regional Banks South Korea N – New York

0.57

4.5

4.8

8482.1

0
Xinyuan Real Estate Co., Ltd. XIN 0215 – Construction Services China N – New York

0.33

2

2.1

215.1

8.8
Yongye International Inc YONG 0103 – Chemical Manufacturing China M – Nasdaq

0.55

1.9

1.3

163.7

2.8
ZHONGPIN INC. HOGS 0515 – Food Processing China M – Nasdaq

0.89

6.6

5.5

371.9

18.1
Zuoan Fashion Ltd (ADR) ZA 0403 – Apparel/Accessories China N – New York

0.6

2.4

1.8

102.1

0

Full disclosure: long AIZ, PBR, RGA, SFG, VLO

PS — be wary of Chinese companies, I mean it…? Also, use the Ctrl-Minus key to view this in entire.

7 thoughts on “Grow Embedded Value”

  1. David,

    I am afraid the creeping re-nationalization of PBR is killing it as a productive investment.

  2. Thanks for the ideas. 2 observations.

    >Buy companies below their tangible book value when they have good earnings, and good earnings prospects.

    I use PEG to help me know if earnings are good. I like PEG be wary of Chinese companies

    I have taken my glove and gone home. In general, I do not want to play there.

  3. Posting error –

    Thanks for the ideas. 2 observations.

    >Buy companies below their tangible book value when they have good earnings, and good earnings prospects.

    I use PEG to help me know if earnings are good. I like PEG under 1.

    >be wary of Chinese companies

    I have taken my glove and gone home. In general, I do not want to play there.

  4. The 2 things about this list that stuck out to me are:
    (1) There are a lot of non-US companies with governments that do not respect investors (China, post-Lula Brazil, and Russia)

    (2) The list contains a large number of financial companies. Lets be diplomatic here and just say the “earnings” of financial companies involve a lot of accounting creativity and a lot of Fed subsidies. The underlying business models do not support the bloated cost structures built into these financial cos.

    Adept traders might have made money trading in and out of big department store chains over the years — but outside of short term M&A trades, department stores were a losing play… Financial companies today are the same

  5. Mr. Aleph I am not the most familiar in single stock analysis but am I correct in saying that even though Citigroup have made it on there, it is likely that their book value on liquidation would be a lot less than the TBV?

    1. Call me David. Yes, financial institutions, particularly complex ones like Citigroup have to take a haircut on TBV — one proxy is to look at level 3 assets. Another thing to understand is liability complexity, particularly at life insurers with a lot of secondary guarantees.

Comments are closed.

Theme: Overlay by Kaira.