by Tim Melvin | September 19, 2013 8:50 am
As a deep value investor, I run lots of screens and searches for undervalued stocks to buy that might have the potential for outstanding long-term returns. While this is more work than just buying the dip in Apple (AAPL) or Google (GOOG), I have found over the years that it is more rewarding — both financially and intellectually — to separate from the herd and look in the dark corners of the market for ideas.
One of the more interesting screens is one that looks for companies where the management is clearing adding value to the company that is not yet recognized by the stock market.
I look for companies where the stock is trading below book value, and the book value is growing faster than reported earnings. This indicates that management is adding value to the business and growing the balance sheet and net worth of the company faster than the earnings would suggest. This could be an insurance company with a solid growing investment portfolio, a management team finding newer high ROE projects in which to reinvest capital, or balance sheet management steps such as paying down debt. Whatever it is, assets are growing faster than the cash is coming in the door.
It is no surprise that when I run this screen right now, there are some insurance companies on the list. I used a five-year look back at earnings and assets, and business conditions have been weak as the limping economy keeps a lid on property and casualty premiums and low rates hamper life insurance sales. However, those with very conservative investment portfolios have benefitted from falling rates and rising asset values.
Two of my old favorites make the list. American National (ANAT) has grown book value by about 4% annually while earnings have been a little less than flat the past five years. The stock is cheap right now at less than 70% of tangible book value. So is National Western Life Insurance (NWLI) at 52% of book value. They have grown book value by about 6.5% while earnings growth has been less than 2% for the half decade. Other insurance companies making the list include Genworth (GNW) and CNA Insurance (CAN).
A lot of smaller banks have made the list as well as credit conditions have improved raising book value while earnings have struggled due to low loan demand and poor net interest margins. Some of the more interesting small banks are those that have done thrift conversion transactions that substantially raise both book values and capital levels. Two banks that have done conversions in the past five years to improve the balance sheet and book value that make the list are Cape Bancorp (CBNJ) and Malvern Bancorp (MLVF). Both trade below tangible book value and are outstanding buys for patient investors.
As of this writing, Tim Melvin was long ANAT, NWLI, CBNJ and MLVF.
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