Cheap Stocks to Buy for Huge Value

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When stocks are ranked by price-to-book-value, the lowest 10% will almost always outperform the overall market by a wide margin over time. The problem for us as investors is that with something like 10,000 stocks just here in the United States, we would need to own hundreds of individual cheap stocks in order to fully capture the value effect.

insider buying dividend stocks dollar arrow dividend stocksHowever, we can combine price-to-book-value with other tools to narrow the universe and find cheap stocks with increased probability of success, reducing the number of holdings needed to capture the value premium.

Jospeh Piotroski found in his study “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers” that less than 44% of all stocks trading below book value actually outperformed over a two-year time frame. The outperformance of low price-to-book-value returns came from a handful of super performers while the majority of the portfolio languished.

Piotroski developed a nine-point model that helps identify the companies that are likely to keep moving higher over time and provide the superior returns associated with deep value investing. The higher the F-score, as he calls his scale, the better the chances the stock will be a winner over the next few years.

Over the years, I have found that this approach works much better on small-cap stocks than the more efficient large caps, and work by Robert Novy Marx and Tobias Carlisle support this position. Looking for a portfolio of small-cap stocks that trade below book value and have high F-scores can help us build a portfolio of stocks that allows us to capture the value effect with a much smaller universe of securities.

Cheap Stocks to Buy

LS Starrett (SCX) is a good example of such a stock. The company isn’t in what you would call an exciting business. SCX makes measuring and cutting tools like optical vision and laser measuring equipment, levels and various saw blades. While these are hardly high-tech products, the company has been around since 1880 and does business in North America, Brazil, China and the United Kingdom. SCX stock is trading at 90% of book value and earns an almost perfect F-score of 8 right now. As a bonus, the stock has a decent dividend and the shares currently yield 2.5%.

Orion Marine Group (ORN) is in the marine-based heavy construction industry. The company’s services include things like marine transportation facility construction, marine pipeline construction and various forms of dredging. Business has been slow the past few years as both the private and public sector have held off on capital expenditures. But there are signs this trend is reversing, and Orion has been bidding on several new projects and signed $64 million of new contracts in late May. Orion marine shares trade at 83% of book value, and the company has an F-score of 7, indicating that conditions and prospects are improving for the company and the ORN stock price.

Combining price-to-book-value metrics with a strong financial measuring tools like the Piotroski F-score can help you capture and improve on the value effect by concentrating your portfolio on cheap stocks with solid financial conditions and prospects.

As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/cheap-stocks-to-buy-value/.

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