On Demand

Grow Embedded Value

by

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:

companytickerimg_desccountryexchg_descP / TBP / EExpected P/EMkt capLT Debt/ Equity
AerCap Holdings N.V.AER0939 - Rental & LeasingNetherlandsN - New York

0.66

7.6

5.2

1524.4

263.6

Aircastle LimitedAYR0939 - Rental & LeasingUnited StatesN - New York

0.64

8.4

8.1

931.2

202.1

American International Group,AIG0715 - Insurance (Property & Casualty)United StatesN - New York

0.55

2.9

9.8

56637

73.6

Anworth Mortgage Asset CorporaANH0933 - Real Estate OperationsUnited StatesN - New York

0.94

7.8

7.9

917.8

3.8

Assurant, Inc.AIZ0709 - Insurance (Life)United StatesN - New York

0.74

5.7

6

2992.7

19.6

AXA (ADR)AXAHY0709 - Insurance (Life)FranceO - Over the counter

0.88

7.6

5.8

29204.3

21.5

Axis Capital Holdings LimitedAXS0715 - Insurance (Property & Casualty)BermudaN - New York

0.86

8.3

8.8

4325.9

19.3

AXT, Inc.AXTI1033 - SemiconductorsUnited StatesM - Nasdaq

0.94

7.5

9.9

129

2.8

Banco Bilbao Vizcaya ArgentariBBVA0724 - Money Center BanksSpainN - New York

0.9

8.7

6

34554.8

250.4

Barclays PLC (ADR)BCS0727 - Regional BanksUnited KingdomN - New York

0.42

6.9

3.6

31291.9

44.7

Callon Petroleum CompanyCPE0609 - Oil & Gas OperationsUnited StatesN - New York

0.86

1.7

5.8

171.6

62.6

Chimera Investment CorporationCIM0703 - Consumer Financial ServicesUnited StatesN - New York

0.73

4.6

5.3

2434.6

59.2

China Gerui Adv Mtals Grp LtdCHOP0121 - Iron & SteelChinaM - Nasdaq

0.55

2.3

1.7

157.4

0

China Zenix Auto InternationalZX0415 - Auto & Truck PartsChinaN - New York

0.49

1.8

1.4

127.3

0

Citigroup Inc.C0724 - Money Center BanksUnited StatesN - New York

0.53

7.4

5.8

77291.7

165.3

Corning IncorporatedGLW1024 - Electronic Instruments & ControlsUnited StatesN - New York

0.95

8

8.4

19410

14.7

Crexus Investment CorpCXS0933 - Real Estate OperationsUnited StatesN - New York

0.85

6.6

9.4

779.2

0

Deutsche Bank AG (USA)DB0727 - Regional BanksGermanyN - New York

0.65

7.6

4.7

31543.1

318.7

GeoEye Inc.GEOY0909 - Business ServicesUnited StatesM - Nasdaq

0.8

7.3

8.7

358.5

97.6

Hardinge Inc.HDNG0218 - Misc. Capital GoodsUnited StatesM - Nasdaq

0.74

8

7.4

105.1

4.3

Homex Development Corp. (ADR)HXM0215 - Construction ServicesMexicoN - New York

0.91

8.6

5.5

846.4

85.4

Ingles Markets, IncorporatedIMKTA0957 - Retail (Grocery)United StatesM - Nasdaq

0.91

9.9

8.2

400

183.1

Ingram Micro Inc.IM1006 - Computer HardwareUnited StatesN - New York

0.77

9.6

7.6

2591.2

8.7

Jinpan International LimitedJST1024 - Electronic Instruments & ControlsChinaM - Nasdaq

0.85

5.3

4.7

132

0.8

Kelly Services, Inc.KELYA0909 - Business ServicesUnited StatesM - Nasdaq

0.77

6.4

7.4

462.9

0

KeyCorpKEY0727 - Regional BanksUnited StatesN - New York

0.83

8.4

9.5

7339.2

90.7

KKR Financial Holdings LLCKFN0718 - Investment ServicesUnited StatesN - New York

0.89

5.1

4.7

1557.4

0

Knightsbridge Tankers LimitedVLCCF1118 - Water TransportationBermudaM - Nasdaq

0.61

6.9

9.4

215.2

42

KT Corporation (ADR)KT0915 - Communications ServicesSouth KoreaN - New York

0.89

9

7

7041.3

72.6

Le Gaga Holdings Ltd ADRGAGA0509 - CropsHong KongM - Nasdaq

0.89

8.1

4.1

200.3

5.3

Lihua International IncLIWA0127 - Misc. Fabricated ProductsChinaM - Nasdaq

0.7

3.1

2.1

161.3

0

LUKOIL (ADR)LUKOY0606 - Oil & Gas - IntegratedRussiaO - Over the counter

0.68

4.2

4

47753.8

10.4

Mechel OAO (ADR)MTL0124 - Metal MiningRussiaN - New York

0.8

4.6

3.5

3322.6

139.6

Metlife IncMET0709 - Insurance (Life)United StatesN - New York

0.69

5.7

5.4

32402.5

45.3

Mizuho Financial Group Inc. (AMFG0727 - Regional BanksJapanN - New York

0.9

3.5

8.5

40165.5

236.3

Navios Maritime Holdings Inc.NM1118 - Water TransportationGreeceN - New York

0.53

4.6

7.6

350.3

131.3

Newfield Exploration Co.NFX0609 - Oil & Gas OperationsUnited StatesN - New York

0.98

5.9

8.8

3943.1

72.2

Olympic Steel, Inc.ZEUS0127 - Misc. Fabricated ProductsUnited StatesM - Nasdaq

0.86

8.8

6.4

181.8

95.4

Orbotech Ltd.ORBK1033 - SemiconductorsIsraelM - Nasdaq

0.78

6.3

9.7

329.7

13.1

Patterson-UTI Energy, Inc.PTEN0612 - Oil Well Services & EquipmentUnited StatesM - Nasdaq

0.93

6.6

8.3

2276.5

18.7

Petroleo Brasileiro SA (ADR)PBR0606 - Oil & Gas - IntegratedBrazilN - New York

0.9

6.8

6.3

126006.1

43.5

Phoenix Companies, Inc., ThePNX0709 - Insurance (Life)United StatesN - New York

0.21

3.6

3.7

203.5

45

Popular, Inc.BPOP0727 - Regional BanksPuerto RicoM - Nasdaq

0.52

8.9

6.1

1664

47.1

Protective Life Corp.PL0709 - Insurance (Life)United StatesN - New York

0.7

7.2

8

2557

53

Reinsurance Group of America IRGA0706 - Insurance (Accident & Health)United StatesN - New York

0.68

7.8

7.2

4059.3

34.9

Republic Bancorp, Inc. KYRBCAA0727 - Regional BanksUnited StatesM - Nasdaq

0.94

4.7

8.7

489.6

7.7

REX American Resources CorpREX0103 - Chemical ManufacturingUnited StatesN - New York

0.65

7.8

6.8

163.9

41

Royal Caribbean Cruises Ltd.RCL1118 - Water TransportationUnited StatesN - New York

0.71

9.7

9.5

5542.1

91.9

Societe Generale SA (ADR)SCGLY0724 - Money Center BanksFranceO - Over the counter

0.29

5.8

3.8

16945.2

20.7

StanCorp Financial Group, Inc.SFG0706 - Insurance (Accident & Health)United StatesN - New York

0.84

2.5

8.7

1676.1

14.8

StealthGas Inc.GASS1118 - Water TransportationGreeceM - Nasdaq

0.38

8.5

5

122.1

98.5

Symetra Financial CorporationSYA0709 - Insurance (Life)United StatesN - New York

0.47

7.8

8.5

1494.6

0

Tech Data CorpTECD1006 - Computer HardwareUnited StatesM - Nasdaq

0.96

9.8

8

1918.9

2.9

Ternium S.A. (ADR)TX0121 - Iron & SteelLuxembourgN - New York

0.81

8.3

5.8

3993.4

26.2

Thompson Creek Metals Company,TC0124 - Metal MiningUnited StatesN - New York

0.33

3.5

5.7

563.9

20.8

Transportadora de Gas del SurTGS0609 - Oil & Gas OperationsArgentinaN - New York

0.43

5.6

7.5

191.7

80.6

TravelCenters of America LLCTA0963 - Retail (Specialty Non-Apparel)United StatesA - American

0.51

4

3.7

145

31.9

Triple-S Management Corp.GTS0806 - Healthcare FacilitiesPuerto RicoN - New York

0.76

9.4

8.6

510.6

18.2

Unit CorporationUNT0612 - Oil Well Services & EquipmentUnited StatesN - New York

0.94

8.7

9

1819.7

15.8

Valero Energy CorporationVLO0609 - Oil & Gas OperationsUnited StatesN - New York

0.86

9.1

5.6

13578.5

40.5

Vishay IntertechnologyVSH1033 - SemiconductorsUnited StatesN - New York

0.97

7.7

7.1

1433.8

23.4

Woori Finance Holdings Co., LtWF0727 - Regional BanksSouth KoreaN - New York

0.57

4.5

4.8

8482.1

0

Xinyuan Real Estate Co., Ltd.XIN0215 - Construction ServicesChinaN - New York

0.33

2

2.1

215.1

8.8

Yongye International IncYONG0103 - Chemical ManufacturingChinaM - Nasdaq

0.55

1.9

1.3

163.7

2.8

ZHONGPIN INC.HOGS0515 - Food ProcessingChinaM - Nasdaq

0.89

6.6

5.5

371.9

18.1

Zuoan Fashion Ltd (ADR)ZA0403 - Apparel/AccessoriesChinaN - 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.

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About the Author

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that. In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. My chief responsibility will be to develop economic analysis with equity and fixed income strategies and provide advice to the firm’s sales & trading staff and its client base. Beyond that, we hope to develop my value investing into a product for out clients.

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