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Investment Ideas

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There are many ways to value a company. One of the most conservative ways is to take the value of a company's assets and subtract its liabilities. What's left over is the company's book value.

Of course, the value of a company's assets and liabilities are often subject to estimates by management and can include hard-to-measure intangibles like goodwill, patents and intellectual property. But if you strip out intangible assets and focus just on hard assets, and subtract the liabilities, you're left with the more conservative tangible book value.

Essentially, this is the what's left over for shareholders if a company were to liquidate all of its assets and pay off all of its obligations.

Catch-22

So how much are you willing to pay for a company's net assets? This usually depends on a how well the company is doing. Typically companies with strong returns on equity (ROE) and thus growing book values trade at high multiples to their book value.

But historically, stocks that trade at low price to book (P/B) multiples tend to outperform those with high price to book multiples.

S&P Cheap by Historical Standards

Currently the median price to book multiple on the S&P is 2.4, well below its 15-year median of 3.8. And the median ROE is increasing. That's a sign that the stock market may be undervalued.

And if you look hard enough, there are some really great values out there.

3 Cheap Stocks

Theoretically a company shouldn't trade below its tangible book value. But I've found 3 that are currently doing just that, while also maintaining a solid ROE.

In other words, if these companies were to cease operations today, sell off all of their tangible assets and pay off all of their liabilities, what's left over would be worth more than what the market is currently pricing them at.

1. Valero Energy (VLO - Analyst Report)

Return on Equity (TTM): 16.7%
Return on Equity (5yr Avg): 13.0%
Price to Book Value: 0.7
Price to Tangible Book Value: 0.7

2. American Greetings (AM)

Return on Equity (TTM): 12.1%
Return on Equity (5yr Avg): 9.6%
Price to Book Value: 0.7
Price to Tangible Book Value: 0.7

3. Goldman Sachs (GS - Analyst Report)

Return on Equity (TTM): 8.4%
Return on Equity (5yr Avg): 19.2%
Price to Book Value: 0.7
Price to Tangible Book Value: 0.8

The Bottom Line

Tangible book value is what's left over for shareholders if a company were to liquidate all of its assets and pay off all of its obligations. It is rare for stocks to trade below this level, especially ones with positive returns on equity. But these 3 are currently doing just that.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com and Co-Editor with Steve Reitmeister of the Reitmeister Value Investor that snaps up discounted value stocks and sells them after the market realizes their true worth for long-term gains.

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