One of the regular discussions -- and often arguments -- around Chez Melvin has to do with what does and does not work in the markets. I regularly rail and rant against such flawed ideas as the "Fed model," earnings projections and discounted cash flow. I am not a big fan of most of the multi-factor economic models or technical-analysis coloring-book projects I see all the time either. Over the years, I have found that they contain flawed assumptions and will fail when you need them the most.
Instead, I think most investors are better off focusing on tangible book value, credit scores and dividends. When evaluating growth stocks, a climb in book value is as important as that in the more easily manipulated earnings figure. While I didn't necessarily win last night's round of the discussion, it did spark a screen idea that may have some merit.
I decided to combine the two concepts and search for companies whose stocks are trading below tangible book value, but for which management has been able to successfully navigate the past decade and grow book value at a decent rate. Although I look at book-value growth when evaluating stocks, I had never run a screen combining these two from the outset, so it seemed a worthwhile endeavor.
Given the economic weakness of the past few years, you would not expect a steel company to show up on this list. Many of the steel companies have cheap stock valuations right now, but they have struggled to grow. But that is not the case of ArcelorMittal (MT), the Luxembourg-based steel and mining company. The company has grown book value at more than a 20% annual rate over the past decade, and has maintained 18% growth over the more challenging period of the past five years. The global economic slowdown has hurt the stock price, and the shares currently trade at just 60% of tangible book value.
Moreover, there are signs that business may improve for ArcelorMittal next year in the key Asian markets. It may take a quarter or two for the company to work off excess inventory and capacity in the global steel markets, but as conditions improve the company stands to see strong revenue and earnings growth. Further, while it had been in a standoff with the French government over a plant in that country, the dispute seems to have been resolved without the threatened nationalization. The road ahead may be bumpy for this stock, but in the long run this company is a dominant player in global steel and ore markets, and it should recover along with the global economy.
Wintrust Financial (WTFC) makes the grade here, as well, having achieved 16% annual book-value growth over the past decade. The bank is seeing strong revenue and earnings from the mortgage-banking division, which has doubled its profit in the past year. The company has 15 community bank operations, with more than 100 branches in the Chicago-Milwaukee corridor. It's also one of the larger premium finance companies in the U.S., offering credit arrangements for policyholders to pay insurance premiums. Wintrust has recently completed two mergers, assisted by the Federal Deposit Insurance Corporation (FDIC), and it is highly likely that the firm will become a serial acquirer of other small community banks over the next few years.
I was also surprised to see a regional airline on the list. The market has grown very competitive over the past decade, and this particular sector has been particularly hurt by rising fuel costs, along with a weak economy. In spite of this, SkyWest (SKYW) has been able to compound book value growth at 12% per year.
With more than 4,000 daily flights out of major airports, the company is a market leader in regional air travel. It has code-sharing arrangements with United Continental (UAL), Delta, (DAL) and AirTran (LUV), and it operates most of its flights under those umbrella arrangements. As with all under airlines, SkyWest has some headwinds as it heads into 2013, but the long-term future of the company is bright. The stock is trading at just 40% of tangible book value, so you would not be paying much for future growth potential. The company can ride out any short-term difficulties, as it has more than $730 million in cash and short-term investments on the books.
One observation from this screen is that the output is very small. Only a handful of names make the grade. There are literally dozens of stocks that are "almosts," with strong book value growth but stock prices that have appreciated just above book value. A broader stock-market decline, therefore, could create a plethora of bargain issues that have demonstrated the long-term ability to grow.