The move to share repurchases over the last few years has made the price-to-book ratio less reliable for finding hidden opportunities in stocks.

How’s that, you ask?

If a company repurchases shares at a price higher than its current book value per share, it lowers the book value per share. For example, if Company A trades at $20 and its book value per share is $10, and its management buys back its shares, the book value falls below $10. Let’s say $9.50 for simplicity’s sake.

Now, if its earnings per share were $2, and the share repurchase boosts the EPS to $2.10 due to fewer shares outstanding, the return on equity jumps from 20.0% ($2/$10) to 22.1% ($2.10/$9.50).

So, if you’re screening for stocks with return on equity ratios above 21%, the share repurchase makes the stock eligible, whereas, before the repurchases, it wouldn’t have met the criteria. 

It’s something to remember when you’re looking to snag undervalued stocks. 

However, to avoid being fooled by share repurchases, I’ll screen for S&P 500 stocks below a price-to-book ratio of 1, but I’ll also consider the stock’s free cash flow yield. If it’s above 4% — free cash flow for trailing 12 months divided by enterprise value (you can use market capitalization) — it’s worthy of consideration.    

Loews (L)

My first selection is Loews (NYSE:L), a holding company controlled by the Tisch family. Its stock hasn’t fared very well in recent years. However, from Dec. 31, 1999, through July 5, 2023, it’s got a compound annual growth rate (CAGR) of 8.7%, 195 basis points higher than the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) over the same 23.5 years.

Loews is a smaller version of Berkshire Hathaway (NYSE:BRK.B) with an enterprise value of $22.1 billion, less than 4% of Warren Buffett’s behemoth. Loews currently has a P/B of 0.94x, about two-thirds of Berkshire’s ratio. 

It has four large investments, three of which are private companies: Boardwalk Pipelines (energy), Loews Hotels (consumer discretionary), Altium Packaging (industrials), while the fourth is a 90.1% interest in CNA Financial (NYSE:CNA) (financial), a property and casualty insurance company based in Chicago. 

In addition to the four investment vehicles, it has $3.1 billion in cash and equity investments on its balance sheet, offset by $2.3 billion in debt. 

So, Loews currently has a $13.6 billion market cap. Subtract the net cash of $800 million, and we’re down to $12.8 billion. CNA’s market cap is $10.5 billion, which values the holding company’s 90% stake at $9.5 billion, which suggests the three private businesses are collectively worth $3.3 billion. 

Its trailing 12-month free cash flow is $2.9 billion [cash flow]. Based on an enterprise value of $22.1 billion, Loews has a free cash flow yield of 13.1%. I consider anything above 8% to be value territory.

In this case, the sum of the parts is worth far more than its current market cap.   

Viatris (VTRS)

I recently included Viatris (NASDAQ:VTRS) in an article about stocks ready to rally under new CEOs. 

The pharmaceutical company was created through the  November 2020 merger of Pfizer’s (NYSE:PFE) Upjohn business, and Mylan N.V. Scott Smith was hired as its CEO on April 1. Smith’s 10 years at Celgene include leading the development of Otezla, a blockbuster drug to treat psoriasis.   

As I said in my article, VTRS stock has lost 37% since the merger. As a result, its P/B is 0.57x, about one-seventh the average S&P 500 stock. This makes it one of those hidden opportunities in stocks.

Its legacy drugs include Lipitor, Norvasc, Celebrex, Zoloft, and Viagra. They generated $2.42 billion in Q1 2023 revenue. That’s approximately 65% of its overall revenue for the quarter. Generic drugs accounted for another 31%, with biosimilars accounting for 4%.

That’s the good news. The bad news is that revenues were 6% lower in the first quarter than last year, leading to a 17% decline in adjusted net earnings year-over-year to $933 million. 

However, it’s got three billion-dollar-a-year franchises that it’s building, so the future remains very bright. 

With a trailing 12-month free cash flow of $2.3 billion and an enterprise value of $30.2 billion, its free cash flow yield of 7.6% is on the cusp of value territory. At the very least, you’re unlikely to get hosed on a long-term bet on Viatris stock.

WestRock (WRK)

WestRock (NYSE:WRK) provides fiber-based packaging solutions to many end-users from over 300 production facilities worldwide. In October 2021, WestRock reorganized into four reportable segments: Corrugated Packaging (49% of revenue), Consumer Packaging (24%), Global Paper (22%), and Distribution (5%). This is an example of one of those hidden opportunities in stocks.

The company is in the middle of executing its portfolio optimization strategy. As part of this rightsizing, it announced on May 2 that it would close its paper mill in North Charleston, South Carolina. Its last production day is Aug. 31. Approximately 500 people worked at the mill. Upon shutdown, Westrock will no longer produce unbleached saturating kraft paper. 

As a result of its strategy, WestRock lost $2.0 billion in Q2 2023, most of the loss from a $1.9 billion pre-tax non-cash goodwill impairment. Excluding these one-time items, it made $198 million on $5.28 billion in sales, down from an adjusted net income of $309.4 million a year earlier on $5.38 billion in sales.

“Closing our North Charleston mill is another step in our ongoing portfolio optimization strategy. We are accelerating our efforts to streamline our operations and drive growth in the most attractive markets,” stated CEO David B. Sewell. 

WRK trades at 0.75x book, its lowest multiple in the past decade. Based on its trailing 12-month free cash flow of $855.5 million and an enterprise value of $16.4 billion, it has a free cash flow yield of 5.2%. I consider anything between 4% and 8% in fair value territory. This makes it one of those hidden opportunities in stocks.

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.