Four Beaten-Up Stocks Trading Below Book Value: John Dorfman

One of the most old-fashioned ways of measuring value is one of my favorites. I like to search for stocks selling for less than book value.

Today, with fear outweighing greed on most investors’ mental scales, there are quite a few candidates. Of approximately 1,500 U.S. stocks with a market value of $1 billion or more, 117 were selling below book value last week.

Two of them I like are Loews Corp. and WellPoint Inc. A couple of smaller companies worth considering are Bristow Group Inc. and Radian Group Inc.

Book value is corporate net worth -- a company’s assets minus its liabilities. The price-to-book ratio is the ratio of a stock’s price to the company’s book value per share. In normal conditions I look for ratios of less than two. Today I see many candidates below 1.5 and some at less than one.

A low price-to-book ratio doesn’t guarantee a stock will go up. But studies by both academics and professionals show that a low ratio tips the odds in an investor’s favor.

One of my favorites in this group is Loews, which languishes at 0.8 times book value and eight times earnings. In the past year or so, I’ve written favorably about two of the company’s publicly traded subsidiaries, CNA Financial Corp. and Diamond Offshore Drilling Inc.

New York-based Loews is a diversified holding company controlled by the Tisch family. Over the years, it has held large stakes in media, tobacco and energy companies, among others.

Strong Potential

Today, CNA, an insurance holding company, and Diamond Offshore, a deepwater oil driller, are the two main operating subsidiaries. Loews owns 90 percent of the former and 50.4 percent of the latter. Diamond had an impressive 39 percent return on equity last year.

CNA hasn’t performed as well, earning only 4 percent on equity in its last fiscal year. But the company has potential to improve: It swung to a profit in 2009 from a loss in 2008, and is expected to show earnings increases this year and next.

Investors who have moral objections to the tobacco industry can take comfort in the fact that Loews spun off Lorillard Inc. in 2008. However, I believe that Loews could still be liable in tobacco liability lawsuits under some circumstances.

WellPoint, the nation’s largest health insurer in terms of enrollment, is based in Indianapolis and operates Blue Cross and Blue Shield plans in more than a dozen states. It also offers health coverage under other plans, plus dental and vision insurance, pharmacy benefits, life insurance and disability insurance.

Cheapness Counts

Is WellPoint harmed by the new health-care law? Definitely, in my opinion. In particular, I believe that the new requirements that insurers cover people with pre-existing conditions will prove onerous.

But when a stock sells at very cheap multiples, it makes up for a lot of onerous situations. WellPoint shares trade for just under book value, at eight times earnings and 0.4 times revenue. That is deep in bargain territory and makes the risks worth it, in my opinion.

Turning to smaller-capitalization companies, here are two that I find appealing.

Houston-based Bristow Group flies helicopters that take workers and equipment to and from offshore oil drilling rigs. Since mid-March, Bristow shares have dropped from a bit more than $40 to about $31.

Keeping Rigs Productive

Bristow is not dependent on the Gulf of Mexico, where a partial drilling moratorium is in effect. It gets less than a third of its revenue from the U.S. The biggest chunk comes from Europe, and substantial amounts come from West Africa, Southeast Asia, and Latin America.

As for the Gulf, I believe that the six-month moratorium on deep-water drilling won’t be strictly enforced, and won’t be extended. The need for oil in the U.S. is too intense.

Shuttling personnel and tools to all the other offshore rigs worldwide should keep Bristow and its peers busy the next two or three years.

I’ll close with a highly speculative pick --- one of the riskiest I have ever recommended, but with potential for a dramatic gain. It is Radian Group, a Philadelphia insurer that specializes in mortgage insurance and municipal-bond insurance.

Radian went through the wringer during the housing-and- mortgage crisis and the recession of 2007 to 2009. After posting profits from 1990 through 2006, it lost $1.3 billion in 2007, $411 million in 2008 and $148 million in 2009. Most analysts expect further losses in 2010 and 2011.

Yet Radian’s balance sheet is in fairly decent shape, with debt only 74 percent of equity. Last month Radian managed to sell $550 million in stock.

At less than 0.5 times book value and about 0.5 times revenue, I think Radian has appeal for bold investors using capital they can afford to lose. I would put only 1 percent of a portfolio in this position.

Disclosure note: I currently have no long or short positions in the stocks discussed in this week’s column, personally or for clients.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.

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