Low Price-to-Book Value Companies

Low Price to Book Value Companies

Fama/French Analysis

Core-Mark Holding (CORE)

Low Price to Book Value Companies

I read a lot to find the latest tidbits of information about companies that I can pass along to my subscribers. This week, I didn’t have to look far to find a very interesting article written by Dick Davis Investment Digest Editor Chloe Lutts. The Dick Davis Investment Digest is now owned by Cabot Heritage Corp., and Ms. Lutts is the daughter of our President, Timothy Lutts.

Now you may assume, nepotism being what it is, that Chloe Lutts is a neophyte when it comes to investing, but I can assure you she is one of our best editors and writers and knows as much about investing as the most seasoned analysts. You see, Chloe digests hundreds of investment newsletters every week to find the best articles written by experts about the stock market and individual stocks, ETFs, mutual funds, and all things investment-related.

Ms. Lutts’ communiqué on May 14 regarding what’s happening in the stock market today, this year and this decade caught my eye. She and her contributors came up with some very interesting observations. Namely: value stocks with low price-to-book value (P/BV) ratios and stocks with low stock price volatility are beating the stuffing out of all other kinds of stocks!

Well-substantiated Analysis

Based upon facts and figures provided by Al Frank using data from Professors Eugene Fama, Professor of Finance at the University of Chicago Booth School of Business, and Kenneth French, Professor of Finance at the Tuck School of Business at Dartmouth College, small-cap value stocks with low price-to-book value ratios increased 305% during the past 10 years, while small-cap and large-cap growth stocks only increased 151% and 179% respectively. In addition, not only did small-cap value stocks excel, but large-cap value stocks beat small-cap and large-cap growth stocks as well. Ouch!

Chloe’s analysis didn’t stop there. She cited a Bloomberg chart entitled “Less Risk, More Gain” which compared the performance of the Standard & Poor’s 500 Low Volatility ETF (SPLV) with the Standard & Poor’s 500 Index from May 11, 2011 to April 19, 2013. Companies with low stock-price volatility, which tend to be conservative, outperformed the S&P 500 Index 26.8% to 15.9% during the 23-month period. Upon further analysis, the S&P 500 has climbed somewhat faster than SPLV since April 19.

Professors Fama and French, who are well respected, used value stocks with low P/BV ratios in their analysis because they define a value stock as a stock having a low P/BV ratio. You can read Chloe’s article here.

My Previous P/BV Picks

In my December 27, 2012 Cabot Wealth Advisory, I focused on stocks with low P/BV ratios and presented two recommendations: Corning (GLW) and Xerox (XRX). How have my picks fared during the past four and a half months?

GLW climbed 24% and XRX surged 30% compared to a mere 17% gain for the S&P 500 index. If you missed out, at the end of today’s Cabot Wealth Advisory I’ll give you another chance to buy a conservative stock that’s likely to outperform the stock market.

Combining the two analyses cited by Chloe in her May 14 article seems logical to me. That is: find value stocks with low P/BV ratios AND low volatility ratings. I used several criteria to locate the best possible choices: P/BV ratios less than 2.00; Beta less than 1.00; Value Line Financial Strength Ratings of B+ or better; low price-to-earnings (P/E) ratios; dividend yields of 1.0% or higher; and good earnings prospects for the next 12-month and five-year periods.

One stock stands out.

Core-Mark Holding (CORE: 56.04) Max Buy Price is 57.90; Min Sell Price is 72.25

Founded way back in 1888 and headquartered in San Francisco, Core-Mark is one of the largest broad-line, full-service wholesale distributors of packaged products to the convenience store industry in North America.

Core-Mark provides distribution and technology solutions and marketing programs to 30,000 retail stores throughout the U.S. and five Canadian provinces. Core-Mark provides services to traditional convenience retailers, grocers, mass merchandisers, drug, liquor and specialty stores, and other stores that carry consumer packaged goods.

CORE reported disappointing first quarter results. Sales increased 2% and EPS dropped, but management provided an optimistic outlook for the remainder of 2013. I expect sales to advance 11% and EPS to soar 33% during the next 12 months ending 3/31/14. My conservative forecast is somewhat less optimistic than management’s forecast.

CORE shares are reasonably priced at 15.1 times my forward EPS (earnings per share) estimate of 3.75 and with a P/BV ratio of 1.62 when compared to similar wholesale/retail stocks. CORE’s Financial Strength Rating of B+ is adequate, and the Beta volatility index of 0.75 is exceptional. The company’s market cap is less than one billion (small cap), and the dividend yield is currently 1.3%. I expect CORE’s stock price to rise to my Min Sell Price of 72.25 within one year.

I will continue to follow Core-Mark Holding and other first-rate, high-quality companies in Cabot Benjamin Graham Value Investor. In my May Special Feature, my comprehensive analysis turned up five additional bargains with low P/BV ratios that are ready to rocket higher. I hope you will become a subscriber so that you can take advantage of the many bargains that I uncover every month!

Lastly, I’d like to encourage you to register now for this year’s Cabot Investors Conference, being held August 14-16 in Salem, Massachusetts. I’ll be giving several presentations on value investing, and will also be available for one-on-one discussions with all participants. Whether you’re a master of value investing or have just started dabbling in stocks, I guarantee you’ll learn lots that will prepare you to become a Cabot investing dynamo. I encourage you to check out our program and register now:
http://conference.cabot.net

Sincerely,

J. Royden Ward
Editor of Cabot Benjamin Graham Value Letter

Editor’s Note: You can find additional dividend-paying stocks selling at bargain prices in the Cabot Benjamin Graham Value Investor. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 250 stocks.

Click here to get started today!

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