While I have referred to them as "two-cent pennies," that's not to suggest that they are worth twice their current price. The "two-cent penny" reference is simply a metaphor for an asset that may be worth more than its current market value, and it was derived from my discovery that pennies now in circulation that were minted prior to 1982 actually contain 2.12 cents worth of copper and zinc. Those pennies are there for the taking, and I'm surprised to still find so many in my change. Likewise, stocks trading below tangible book value are also there for the taking, although they are bit harder to find these days than copper pennies.
The theory here is that stocks trading below tangible book value can be very cheap, and ultimately, the market will recognize their value, and price them accordingly. It doesn't always happen that way, especially when companies are in distress. To that end, my search has some built-in parameters that attempt to limit the inclusion of the most troubled companies, where tangible book values may not be a true representation of reality.
The screen includes the following criteria:
- 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
Rounding out the list of qualifying companies are Coeur Mining (CDE) and oil and gas company LinnCo (LNCO). Certainly very slim pickings, and not much to be excited about. But that's how it goes at times in value investing. At the time of publication, the author had no position in any of the stocks mentioned. Follow @JonMHellerCFA This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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