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.
2. Kronos Worldwide Inc. ( KRO): Engages in the production and marketing of titanium dioxide pigments in North America and Europe. Market cap at $2.23B P/B is 2. ROE is at 32.17%. TTM Return on Assets at 16.04% vs. an industry average at 8.87%. Despite the attractive ratios, Kronos lost a lot of value after having a bad quarter. 3. Lear Corp. ( LEA): Engages in the design and manufacture of automotive seat systems and related components for automobiles and light trucks. Market cap at $4.78B, most recent closing price at $49.32. P/B is 1.79. ROE is at 19.17%. TTM Return on Assets at 16.72% vs. an industry average at 7.35%. This company has appeared in our screens before. Historically, it's traded very low on a P/E basis and has looked undervalued. The company has generated high earnings but that has corresponded with an increasingly high share price. 4. WellCare Health Plans, Inc. ( WCG): Provides managed care services for government-sponsored healthcare programs in the United States. Market cap at $2.23B P/B is 1.75. ROE is at 19.24%. TTM Return on Assets at 8.49% vs. an industry average at 2.9%. WCG has benefited well from the current political environment. It's revenue is generated almost evenly between Medicaid and Medicare services around the east coast and the south. 5. Yahoo! Inc. ( YHOO): Operates as a digital media company that delivers personalized digital content and experiences, across devices and worldwide. Market cap at $22.87B P/B is 1.57. ROE is at 29.12%. TTM Return on Assets at 23.51% vs. an industry average at 8.56%. Yahoo is a familiar company with outstanding returns to equity. At 29.12%, ROE may be one reason why this stock has gone up 23% in the last 6 months despite otherwise unappealing trends over the last 5 years. For comparison, Facebook has an ROE of a third of just one percentage point.
Written by Freda Ding. ROA and ROE data from ycharts.com