Monday was a day of bloodletting as NFL owners gave pink slips to coaches whose teams' playoff hopes were dashed on Sunday, if not long before that. The decisions can seem pretty cut and dried when it comes down to a team's win-loss record, like the Detroit Lions' 0-16 streak, which cost coach Rod Marinelli his job yesterday.And the Jets' loss of four of their last five games was too much disappointment for Eric Mangini's bosses to take. Wins and losses are cold, hard facts that can't be argued down. As in football, stock ratios are cold, hard numbers, usually based on data that can get fudged a bit. Using several ratios to value a stock helps to cover all your bases in case a company's earnings statements look a little too managed from quarter to quarter.
While I usually look for value stocks in terms of price-to-earnings measurements, when it comes to P/B I look for some growth potential. I consider P/B to be a more useful measure for companies with a lot of real estate or capital equipment, like manufacturers, than for asset-light companies. P/Bs can be a very good value when they are above 1. For example, recent picks Cisco ( CSCO) and Caterpillar ( CAT) each have price-to-book ratios of 2.7; PPG Industries ( PPG) has a P/B of 1.5. To get the P/B ratio, you can go to a site like Yahoo! finance. But if you want to calculate it yourself, you can determine a stock's P/B in two ways: Divide its price per share by its book value of equity per share; or divide the company's market cap by the total book value of equity (from the balance sheet). For my last options call pick, Cameron International's ( CAM) -- an equipment supplier to the oil and gas industry -- total stockholder equity of $2.3 billion divided by 219.5 million shares yields a book value of $10.49 a share. Dividing Mondayʼs closing price of $20.02 by $10.49 gives you a P/B of 1.9. Cameron's P/B reflects the company's better growth outlook relative to its industry, which overall is expected to show a 7.7% earnings drop in 2009. Now let's compare Cameron's P/B to a competitor's. As a potential pick, I passed up Weatherford International ( WFT), which has a forward P/E of 5.3, because earnings are expected to drop by 10.3% in 2009. In fact, Weatherfordʼs low P/B ratio of 0.8 indicates the marketʼs low expectations for the stock.
My deep-in-the-money strategy has led me to my own winning streak of 92-0 for 2008. While I'm still expecting to ring up more wins on open positions in coming weeks, a few of my December wins include $7,100 on Halliburton ( HAL), $5,200 on Nokia ( NOK) and $2,100 on Texas Instruments ( TXN). Always remember: Life is a journey, enjoy the ride! Lenny Dykstra manages Nails on the Numbers, a subscription service sold by TheStreet.com. Dykstra is 92-0 in his options picks this year. Click here for a free trial to Nails on the Numbers. Dykstra writes regularly about options trades for TheStreet.com.