Surprising Results Buying Below Tangible Book

NEW YORK ( TheStreet) -- I've made no secret of the fact that I'm finding it harder to identify value these days. While I don't believe the markets are tremendously overpriced at this point, my world of deep value has simply gotten a lot smaller as the markets have risen. Now, many are expecting some kind of market correction at these levels but that's more about psychology than valuation, in my humble opinion.

One of my columns in November featured stocks trading below tangible book value. The performance of those mentioned in that piece in the ensuing months far outstripped my own expectations.

The search utilized the following criteria:
  • Trading below tangible book value
  • No financial names
  • Long-term debt to equity less than 50%
  • Companies must be profitable on a trailing 12 month basis
  • Minimum market cap $100 million

In the piece, I revealed seven names that met the rather stringent criteria, and these have risen an average of 27% in the four months since my piece ran, well ahead of the S&P 500's 12.1% gain, or the Russell 2000's 18.5% gain. I rarely expect quick results like that, and there's no doubt that the results were aided by the rising tide of the markets.

Of the seven names, there was just one stock in negative territory, American Greetings ( AM), which was down 4.1%. While the company still trades at just 0.81 times tangible book value, its debt to equity ratio has risen to about 56%, and it no longer makes the cut.

The big winners were oil related. Patterson-UTI Energy ( PTEN) was up 54%, and is trading at a 52 week high. Omega Protein ( OME), which is an "oil" company of a different sort -- harvesting menhaden fish in order to make fish oil -- is up more than 43%. I've owned this name previously, but have missed out on its recent run. Despite the very strong performance, Omega still trades just below tangible book.

OME Chart OME data by YCharts

Among the other names in my original piece, Kelly Services ( KELYA) is up more than 35%, while Hess ( HES) has risen about 36%. Rounding out the list are Rowan ( RDC) up 11% and Corning ( GLW) up 13%.

Corning, which I do own, has been a bit of an enigma. Shares trade at just 11 times trailing earnings, 10 times 2014 consensus estimates, yield 2.8%, and the company still trades at just 0.94 times tangible book. Yet the stock continues to plod along, with little if any excitement. But that's actually par for the course in value land. Things don't usually happen all that quickly. GLW Chart GLW data by YCharts


While I'm pleased with the results of the tangible book value screen, four months is but a day to a value investor, and the results far exceeded my own expectations. I'll be back next week with a column focused on the current crop of companies meeting my tangible book value screen criteria.

At the time of publication the author was long GLW.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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.