One would suspect that a value investor would spend very little time thinking about growth, but that is simply not the case. Even when focusing on asset-based value investing, we want to see that pile of assets grow in the future or be converted to cash and returned to shareholders.
In the best situations, an investor can find a stock trading below asset value and then see those assets grow faster than the stock price for a period of year. The shares never become overvalued, and you can enjoy the benefits of compounding for a long period of time as the company's value grows. I love finding undervalued assets that are taken over and converted to cash in a short period of time. I am also very fond of owning growing assets at a cheap price for a long period of time.
I ran some screens this morning to help me look for companies that were cheap on an asset basis and generating positive cash flows. I looked for management teams who know how to grow both their businesses and the asset value. Therefore, I also screened for book value growth over the past five- and 10-year periods at a decent rate. I separated out the five-year growth rate to eliminate those that grew quickly pre-crisis but have slipped or stagnated since then.
I am big on stocks that are safe as well as cheap, so I only included companies with Altman Z scores indicative of reasonable financial health. To find companies where fundamentals were indicative of future growth, I looked for stocks that had all the other conditions and have current Piotroski F-Scores above 5. There is no such thing as a perfect stock but this screen comes as close as possible in my opinion.
One stock that caught my eye immediately is an old favorite. I have written about Sterling Construction STRL in the past, as has my fellow Real Money contributor Sham Gad. This heavy construction company specializes in building and repairing transportation and water infrastructure and it's no secret that this business has had a tough time the past few years. Declining tax revenues have caused states and municipalities to sharply limit infrastructure spending and this has decreased opportunities for Sterling.
Yet in spite of the difficult operating conditions and lack of new contracts, management has been able to increase the company's asset base and pay down debt over the past five years, which has allowed its book value to grow nicely. This Texas-based name has been smart about acquisitions during the downturn by purchasing smaller companies. Thus, it has expanded its base of operations to Arizona and California -- in addition to its existing markets in Texas, Utah and Nevada.
The company passes all of my other tests and the stock is cheap. The shares currently trade right at tangible book value and have an enterprise value EV/earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of less than 3 at today's price. Infrastructure spending has been delayed and it probably will be for another year or two as the economy slowly returns to a solid growth trajectory.
Another infrastructure company that shows up in my list is Layne Christianson LAYN, which offers drilling services, construction and water treatment services primarily to municipal customers. The minerals division provides drilling services for miners and oil and gas companies around the world.
Rising commodity prices have allowed the mineral exploration business to offset the weakness in the municipal infrastructure markets over the past few years and this trend should continue. Low natural gas prices will also likely slow down its unconventional energy division for the foreseeable future. However, rising prices of gold, copper and other precious metals should make for brisk mineral exploration activity.
This company has been profitable every year for the past decade and its book value has grown at an impressive pace over that time. The balance sheet is solid and the company trades right at tangible book value. When the water infrastructure business picks up in a stronger economy, this stock could recover back toward its 2008 highs (which were in the upper $50s) as a result of strong earnings and asset growth.
Warren Buffett once famously remarked that growth and value are joined at the hip. Finding a company that has undervalued assets and a management team with a proven ability to grow the assets can be the best of both worlds for patient investors.