Investing by the Book

 | Sep 24, 2012 | 1:00 PM EDT  | Comments
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With equities in the U.S. enjoying a nice climb, seeking out investment ideas becomes more difficult. In a market environment like this, it doesn't hurt to go back to an old-school Ben Graham investing approach: buy assets for less than asset value. While Graham really loved to buy companies trading for less than net asset value, I'll examine names that qualify by trading for less than book value, and in most cases, less than tangible book value.

The market is not dumb. When businesses are trading for less than book value, it's usually a signal that the market has little confidence in the value as stated, and the ability for those assets to deliver earnings growth. But Mr. Market can be emotional and not value businesses on a rational judgment. For investors, it's a matter of patience. For example, a couple of years ago, Mr. Market was not a fan of oil refiners and, as a result, many major refiners were trading at a fraction of book value. Never mind that it took years and hundreds of millions, if not billions, of dollars to build a refinery. Tesoro (TSO), for example, was trading for less than 40% of book, around $15 a share, in late 2010. Today, the stock fetches $41 -- a 40% premium to book. Patient investors were rewarded with a 200%-plus return on investment.

Chesapeake Energy (CHK), the second-largest natural gas producer in the U.S., currently trades at 87% of book value. The company is in the midst of demonstrating why it should trade at a premium to book by monetizing billions of dollars in assets. And over the next couple of years, billions of additional dollars will be raised via asset sales. A recent director purchased more than 60,000 shares at $20 apiece. When Exxon Mobil (XOM) purchased XTO Energy in 2009 to become a heavy hitter in natural gas, it valued XTO at nearly $18 per barrel of oil equivalent of its proven reserves. CHK sits on about 3 billion BOE of proved reserves. At $18 a barrel, you get a value of more than $54 billion compared with the company's enterprise value of $26 billion today.

Fresh Del Monte Produce (FDP) is a name most, if not all, are familiar with as many of the company's fruits and vegetables are staples of most U.S. households. While the company's overall financial performance suggests quality growth in the years ahead, uneven results in Europe are affecting the company. Still, shares trade for 85% of book despite expected earnings-per-share growth of nearly 40% in 2012. To be sure, this growth is coming from a low base, but even looking out to 2013, both the top and bottom lines are expected to grow respectably. The company has no net debt and trades for 12x trailing earnings. Del Monte is one of the most recognized and trusted names when it comes to fruits and vegetables, not to mention its products are indispensable to most consumers in any economic environment.

Small-cap infrastructure construction company Sterling Construction (STRL) continues to be affected by the lack of a permanent transportation and highway construction bill. Also, poor project bids led to losses and a recent bad quarter. Yet Sterling remains a very attractive company long term given its singular focus on infrastructure work in Texas, Nevada and California. Shares trade for $10 against book value per share of nearly $13. The company has more than $4 in net cash per share sitting on the balance sheet.

Buying stocks below asset value is a favorite metric for many investors for obvious reasons, and it helps reduce the likelihood of overpaying for a stock. Since price paid is the ultimate determinant of value received, it never hurts to take a closer look at book value when investing.

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