Value Stock-Picking, Week 2: How to Pick Bargain Stocks

Editor's note: The Value Stock-Picking Training Program is a series of four weekly assignments. (To start with Week 1, click here.) Each assignment is based on one of James Altucher's strategies in his book, Trade Like Warren Buffett. To get a copy of the book, click here.

This assignment was written by Stockpickr member Ira Krakow.

Don't you just love a bargain when you find one at a flea market or a yard sale? Many times, bargains can be found in the stock market as well. This week, you will learn how to go shopping for the best bargain stocks.

In Trade Like Warren Buffett, James Altucher cites Warren Buffett's two rules for finding bargains:

Rule #1. Don't lose money.

Rule #2. Don't forget Rule #1.

Altucher quotes another Buffettism: "The secret to success is figuring out who to be the batboy for." Buffett was the batboy, so to speak, for Benjamin Graham, the "father" of value investing. Graham's favorite strategy was to find companies that were trading for cash (see liquidity ) and then hold on to them until they traded for more than cash. But how do you do that? Buy stocks when they're "on sale."

Price-to-Book Ratio

Value investors like Buffett are always bargain-hunting. Here's one approach to spotting a bargain stock candidate. Look for a company whose stock price is close to or even less than its book value per share . Look for the stock's price-to-book value ratio , a measure of what the company is worth per share if all of its assets were liquidated.

If a company's stock price is 1.5 times its book value per share or less, it's certainly worth looking into further as a potential bargain stock. Even more of a bargain: if the stock price is less than its book value. That means that if the company's assets were sold, the proceeds of the sale would be worth more than the value of the outstanding stock.