What are we looking for?
With the market struggling to stay positive, let's play value investor and troll for bargains. We'll look for the lowest price-to-book-value ratios in the S&P/TSX composite.
More about today's screen
Book value calculates a company's assets minus liabilities and then divides that by the shares outstanding. To find price-to-book-value per share, we divide the stock price by the book value per share.
This ratio can be insightful but trip investors up. A true value investor wants to pay less than a dollar for a dollar in assets, but it takes more work to determine whether book value reflects reality. Often a company's stated book value is subjective, clouded or inflated by items such as what brands or patents are worth. At other times, book value is underrepresented. For example, land is usually valued at the purchase price - but 20 years later, it might be worth a whole lot more than is recognized on the balance sheet.
What we found out
We do this screen from time to time. When the market was peaking in 2007, less than 10 names were trading below book value on the composite. In the depth of market panic in early 2009, about one third of the index were trading below stated assets. At the beginning of this year, it was back to less than two dozen names trading under book. More names have joined the list since then, but not many, which means it's still not easy hunting for value investors.
Investors will need to do more research before buying any of these stocks. In some cases the market may believe the balance sheet doesn't reflect the earnings value of the assets and a writedown is coming, while in other cases the market might be overlooking a bargain.
Scott Adams