More Two-Cent Pennies

NEW YORK ( TheStreet) - In a column on Wednesday, I reviewed the one-year performance of a group of stocks that were trading below tangible book value per share at this time last year.

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

It's slim pickings this year, as just four companies made the cut this time around, versus 11 at this time last year. There is just one holdover from last year's search, oil-services company Rowan ( RDC), which is trading at about the same price it did one year ago. It trades at 0 .98 times tangible book value, and 11 times the 2014 consensus earnings estimate.

First Solar ( FSLR) also made the cut. The company trades at 0.92 times tangible book value, and was a surprising name on the list. It has nearly $1.3 billion, or $14.40 per share, in cash and short-term investments on the books, and just $256 million in debt.

It is not the type of company I'd typically look at; the word "solar" usually scares me away, but I am intrigued enough to at least dig a little deeper. The stock has come down a long way from the $300+ it briefly traded at back in 2008, and now trades at less than 12 times 2014 consensus estimates. FSLR Chart FSLR data by YCharts

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.

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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