If you’re on the hunt for value stocks to buy, you’ve come to the right place.
In an ode to Ben Graham, arguably the father of investing, I’m going to pull together a list of 10 stocks trading below book value that I believe will appreciate over the next 12 to 24 months.
However, it’s not going to be easy.
I came across an online Barron’s article that discussed the difficulty of buying stocks below book value, as Graham did back in his prime.
Michael Green, portfolio manager at Moody Aldrich Partners “notes that just 6% of New York Stock Exchange companies now trade under book value, versus 25% in March 2000, when the major averages peaked (Green excludes closed-end and bond funds in making this calculation.),” Andrew Bary wrote in 2004.
“Cheap stocks actually were more plentiful during the market bubble than they are now, due to the narrow breadth of the technology-led market advance in 1999 and early 2000. Over the past 75 years, low price-book stocks on the Big Board were most abundant at the historic market bottoms of 1932 and 1975.”
The portfolio manager suggested that a more appropriate metric might be price-to-tangible-book value, which removes goodwill and intangible assets from the equation. Perhaps I’ll look at which value stocks to buy under those guidelines in a follow-up article.
In the meantime, to make the cut, a company must have a P/B of less than 1, a market capitalization greater than $2 billion, and ideally, a positive trailing 12-month (TTM) free cash flow (FCF).
Here’s my list of value stocks to buy:
- Posco Steel (NYSE:PKX)
- SK Telecom (NYSE:SKM)
- Taylor Morrison Home (NYSE:TMHC)
- Honda Motor (NYSE:HMC)
- Cannae Holdings (NYSE:CNNE)
- Graham Holding Company (NYSE:GHC)
- Royal Dutch Shell (NYSE:RDS-A, NYSE:RDS-B)
- Air Lease (NYSE:AL)
- Solar Winds (NYSE:SWI)
- PG&E (NYSE:PCG)
Value Stocks to Buy: Posco Steel (PKX)
Sector: Basic Materials
Market Cap: $22 billion
Posco Steel is the first of two South Korean stocks on my list. This suggests that South Korean stocks might be cheap right now. The iShares MSCI South Korea ETF (NYSEARCA:EWY) would be an excellent place to start if you want to bet on the country itself.
As for Posco Steel, it is the eighth-largest holding in EWY. The company’s been in business since 1968. It now produces 41 million tons of crude steel annually and is the largest steel producer in Korea.
Its business has seen its share of ups and downs over the past five years. However, despite the revenue changes, good and bad, it’s remained profitable. Approximately half of its steel production is shipped to other Asian countries. It also generates up to 20% of its sales from non-steel-related businesses.
Its TTM FCF is 4.03 trillion KRW ($3.4 billion), good for an FCF yield of 15.5%. But, of course, the currency remains a big detractor for many investors.
SK Telecom (SKM)
Sector: Communication Services
Market Cap: $17.8 billion
SK Telecom is the AT&T (NYSE:T) of South Korea. By that, I don’t mean that it makes horrible media investments, but rather that it is the country’s largest wireless carrier with more than 29 million mobile customers. It also owns 75% of SK Broadband, which has more than 8.7 million broadband TV customers.
Like many Asian companies, it owns other businesses, both related and unrelated to the telecom industry.
In April, the company announced that it would split into two companies. The first company will continue the traditional wireless and broadband business. The new business will carry out the investment activities of the company. The management feels the separation will allow investors to better understand and value what they’re investing in.
In August, SK Telecom announced that the second business would be named SK Square. The split will be official on Nov. 1.
Its TTM FCF is 1.95 trillion South Korean Won ($1.64 billion), good for an FCF yield of 9.2%.
Value Stocks to Buy: Taylor Morrison Home (TMHC)
Sector: Consumer Cyclical
Market Cap: $3.3 billion
The first of three consumer cyclical stocks, if you live in California or Arizona, you might be familiar with this Scottsdale-based homebuilder.
In mid-February 2020, I discussed seven reasons to own TMHC stock. Unfortunately, it was terrible timing on my part. The March 2020 correction hammered its stock, knocking off the majority of its value in less than a month. However, I’m happy to report it’s bounced back to where it was trading before the correction.
If you bought at the bottom, I applaud your commitment to this excellent home builder.
Today, I would say virtually all seven of the points I made in 2020 apply today. It had an FCF yield of 7.3% in February 2020. Today, it’s about 20%, making it the value buy amongst its homebuilder peers.
CEO Sheryl Palmer had good things to say about its business in the Q2 2021 press release:
“We now expect to generate returns on equity in the high-teens percent range this year and over 20 percent in 2022 as we have quickly and meaningfully pulled through the benefits of our acquisitions and strategic initiatives that have transformed our ability to compete effectively and generate long-term value,” Palmer said.
I continue to like Taylor Morrison.
Honda Motor (HMC)
Sector: Consumer Cyclical
Market Cap: $53 billion
A quick look at the top publicly traded automobile manufacturers by market cap shows that Honda has one of the lowest P/B of any of them. Not only that, it’s the only one you can buy for less than book value.
In August, investment analyst David Cohne argued that not only is Honda an excellent auto manufacturer, but it’s also an excellent value investment.
Cohne highlights some of its strengths, including its Honda 2030 Vision to electrify its cars and trucks.
“The vision is based on the goal of zero-carbon through electrified mobility products. The company’s focus is on the development of electric vehicles and self-driving cars. Management aims to generate 66% of its global automobile sales from electric vehicles by 2030 and achieve carbon neutrality by 2050,” Cohne wrote on Aug. 25.
With strong demand for its new Honda Civic and an FCF yield of 10.6%, I would agree with Cohne’s assessment.
Value Stocks to Buy: Cannae Holdings (CNNE)
Sector: Consumer Cyclical
Market Cap: $2.72 billion
Cannae is a holding company led by William Foley II, a financier who’s been around for more than 30 years, operating businesses and making investments that have delivered significant value for shareholders, including himself.
While Morningstar considers Cannae a consumer cyclical, you could just as easily call it a financial services business given its holdings. The consumer cyclical tag results from its majority ownership in two restaurant chains: O’Charley’s Holdings and 99 Restaurant Holdings.
In the second quarter ended June 30, its restaurants generated $189.9 million in revenue (94% of its sales). However, the unit accounts for just 3% of Cannae’s book value. It is the company’s other investments where the actual value lies.
The company argues that the sum of its parts is worth considerably more than its current market cap of $2.72 billion. In fact, it estimates that the fair value of its investments — 16% of Dun & Bradstreet (NYSE:DNB) and 8% of Ceridian HCM (NYSE:CDAY) are two of them — is $4.9 billion, or 82% higher.
Take a look at this company. William Foley is the real deal when it comes to capital allocation.
Graham Holding Company (GHC)
Sector: Consumer Defensive
Market Cap: $2.93 billion
In July 2019, I included Graham in a list of seven stocks to buy that, in one way or another, are a part of a student’s everyday life. But, unfortunately, it’s been the biggest disappointment of the seven.
The company was part of the Washington Post group until October 2013, when the paper was sold to Jeff Bezos. Graham became an independent educational business led by its Kaplan International business. However, it’s got its hands in a lot of things, including TV stations, industrial businesses, car dealerships, restaurants, and it even owns the online magazine Slate.
I would say that Graham Holdings is a more hectic version of Cannae Holdings. However, I believe there is value to be extracted by some of its holdings in the future.
But you’ll have to be patient.
Value Stocks to Buy: Royal Dutch Shell (RDS-A, RDS-B)
Market Cap: $159 billion
If you follow my writing, you’ll know I’m the last person you would think would be recommending an oil and gas stock such as Royal Dutch Shell. However, I like to diversify my picks when I do these galleries, and despite the run-up in energy stocks, they’re still relatively inexpensive.
Year-to-date through Sep. 21, RDS-A is up around 16.5%, which is slightly better than the S&P 500 but worse than the Energy Select Sector Index.
However, the company’s move into renewable energy makes me think it might be a good long-term play.
Shell is changing its spots by jumping into the deep end when it comes to electric vehicles (EVs). To date, it’s already put charging stations at many of its gas stations. It’s also installing its charging stations in the parking lots of grocery stores.
But it is the company’s efforts to put 50,000 charging stations on U.K. streets over the next four years that suggest it realizes the fossil fuel game is up.
“According to the UK’s National Audit Office, over 60% of urban households in England do not have off-street parking, meaning that there’s no practical way for them to install a home charger. A similar situation prevails in many regions, including China and parts of the US,” InsideEV guest contributor Evannex wrote on Sept. 12.
Royal Dutch Shell’s TTM FCF is $20.6 billion, good for an FCF yield of 13%. That’s value territory.
Air Lease (AL)
Market Cap: $4.25 billion
Air Lease is in the business of buying airplanes and then leasing them to airlines. As you can imagine, between Covid-19 and Boeing’s (NYSE:BA) plane troubles in recent years, it hasn’t been quite as lucrative a business.
YTD, AL stock is down almost 10%, 30% worse than the S&P 500. However, there is no question it’s a player in the airline industry.
The company’s September 2021 presentation points out that Air Lease is a $50 billion aircraft leasing platform, including its current ownership of 443 aircraft worth $25.8 billion and 338 on order worth an additional $27.1 billion.
It’s also profitable. In Q2 2021, it had an adjusted pre-tax profit margin of 25.6%. That’s the good news. The bad news is that its pre-tax profit in the second quarter fell by 38%. On the bright side, cash flows from operations in the first half of the fiscal year increased by 29% to $602.7 million.
It’s a play on the return to normal.
Value Stocks to Buy: SolarWinds (SWI)
Market Cap: $2.64 billion
There were slim pickings from the technology sector. I almost went with a third South Korean company, which will remain nameless, but decided to go with the network management software provider.
Yes, the same SolarWinds that was the victim of a significant cyberattack in November 2020.
Not only did SolarWinds’ stock get hammered after the cyberattack came to light, but the company was also forced to replace its CEO in December. It also hurt that the company wasn’t forthright with its venture capital investors about the security breach while raising institutional funds in a private placement.
Since then, it’s recovered some of the losses, but not all, up 6.5% YTD.
However, JMP Securities analyst was confident the event would soon be in its rearview mirror.
“We believe the SolarWinds brand will remain intact as customers continue to seek the company’s attractive value proposition,” CNBC reported JMP Securities analyst Erik Suppiger wrote in a note to clients on Dec. 15.
Despite the security breach, SolarWinds increased its FCF in both 2019 and 2020. As a result, it’s a screaming buy.
Market Cap: $19.7 billion
This last one is controversial. But, unfortunately, there’s no way to sugarcoat it.
PG&E is best known as the California utility whose transmission line caused the November 2018 Camp Fire, the worst in modern California history. The company pleaded guilty to 84 counts of involuntary manslaughter.
As a result, PG&E went into and emerged from bankruptcy after agreeing to fund a $13.5 billion trust to cover uninsured losses from the fire. The company funded the trust 50% in cash and 50% in new PG&E shares. To date, the fund has paid out less than $1 billion.
Now, let me be clear, I wouldn’t invest in such a despicable business, but that doesn’t mean you shouldn’t. If you can get past the tragedy of those events in 2018, you could profit from a stock that’s gone sideways since it emerged from bankruptcy on July 1, 2020.
The company’s largest shareholder is the PG&E Fire Victim Trust, which, as described above, received 477.7 million shares as part of the settlement with the company. The trust owns 24% of its common stock.
The better the stock does, the better the trust does.
So the fact that the Environmental Working Group (EWG) has a problem with the rate increase the company has petitioned the state for — equivalent to $201 million in additional revenue — is puzzling because one way investors value stock is by a multiple of sales. Sales go up; the market cap goes up.
Unfortunately, the only way the victims get out of this mess is if PG&E succeeds today, tomorrow, the day after that.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.