In this screen, we looked for cheap stocks trading near book value with promising profitability. Screening stocks using the price to book value ratio yields interesting results but, of course, has its own blind spots. We wanted to find more mature companies with capacity to grow. To do so, these companies must be efficient in using their assets wisely to generate future revenue.
Criteria in this screen:
- Market cap. over $2B. Smaller or younger companies may have more assets that haven't 1) depreciated and 2) realized returns.
- P/B below 2. The number chosen here isn't entirely arbitrary. It's difficult to find a capital-intensive company trading below book that also has above-average ROA. That's next.
- Enviable ROA. The companies in this screen are generating return on assets in excess of industry competitors. At a glance, these companies are being well-managed from a financial standpoint.
- Growing ROE. The last thing we looked at was a positive ROE trend to confirm that net income has lead the way in equity appreciation.
Feel free to use the list below as a starting point for your own research. One thing that can be looked at closer is ROE compared to competitors. A few companies in this list saw ROE drop around 2009. Was this industry-wide or company specific? Lastly, you can always look to dividends as a factor when thinking about companies close to book value. A mature company operating efficiently and growing slowly is bound to pay out its profits.
Companies in this list:
1. Ares Capital Corporation (ARCC): Ares Capital Corporation is a private equity firm specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. Market cap at $4.43B
P/B is 1.13. ROE is at 12.87%. TTM Return on Assets at 7.81% vs. an industry average at 2.75%.ARCC has a nice, even dividen yield at 8.88%. As a financial company, it might be a concern if a lot of assets need to be written down.
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