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The Search for Two-Cent Pennies Yields Solid Results

NEW YORK ( TheStreet) -- The hunt for two-cent pennies that I laid out in a column one year ago was based on the notion that buying stocks below their tangible book values should make for some compelling returns over time.

I often use "tangible book value" in my stock screens instead of the more commonly used "book value" because tangible book value strips out intangible assets, such as goodwill, where it is difficult to ascertain whether there is any value in those assets.

Buying stocks below tangible book value is typically no recipe for instant gratification; often these situations take time to play out, and require patience. If your typical holding period is measured in days, weeks or months, and not years, then this probably is not for you.

Yet the past year has yielded some solid results for the group of stocks I laid out in last year's column on the subject. That was based on identifying stocks with the following attributes:
  • Market cap greater than $500 million
  • Price to tangible book value below 1
  • All sectors but financials
  • Long-term debt to equity ratio below 50%
  • Positive earnings in trailing 12 months

Just 11 stocks made the cut, and it's not difficult to understand why; the criteria are extremely stringent. But the average return for those companies over the past year is 28.1%, versus 16.8% for the S&P 500 Index, and 23.75% for the Russell 2000. All 11 companies were in positive return territory during the period, and the biggest winner was energy company Hess (HES), which was up 55%, and now trades at about 1.2 times tangible book value. HES Chart HES data by YCharts

Former net/net (a stock trading below net current asset value, or current assets minus total liabilities) Ingram Micro (IM) was the second best performer, up 45%, and recently hit an all-time high. Despite that solid run, Ingram still trades at just 1.16 times tangible book, and less than 9 times 2014 estimates. Other solid performers in the group include another former net/net, Benchmark Electronics (BHE), which was up 38%, and Gulkmark Offshore (GLF), up 40%.

One of the stocks I now hold, Corning (GLW), was up 21%. The stock has pulled back about 15% since May, and currently trades at just 1.03 times tangible book, and just under 10 times its 2014 consensus earnings estimate.

Corning also increased its dividend in May, and yields 2.8%. I also like that the company has been buying back stock, a powerful combination along with the dividend, and has reduced shares outstanding by about 6% since the beginning of 2012.

The balance sheet is also strong; Corning ended last quarter with nearly $5.5 billion, or $3.72 per share, in cash, which gives it leeway for future dividend increases and stock buybacks. GLW Chart GLW data by YCharts

Rounding out the list of qualifying names are Luecadia National (LUK), up 27%; Patterson-UTI Energy (PTEN), also up 27%; Vishay Intertechnology (VSH), up 22%; Bunge (BG), up 21%; Unit Corp. (UNT), up 12%; and Rowan (RDC), up 4%.

I'll be back with a new list of stocks that meet the search criteria in an upcoming column.

At the time of publication, Heller was long Ingram Micro and Corning.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
At the time of publication, Heller was long XXXX.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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