Stock Screen: Using the Price-to-Book Ratio

In our previous stock screen, we returned to basics, with a look at value investing as practiced by one of the masters, Benjamin Graham. The parameters in the last screen included a price-earnings ratio lower than the market, a price-to-sales ratio lower than the market, and a dividend yield higher than the market.

There is one more important and closely watched value metric: the price-to-book value ratio. It represents the recent closing stock price divided by the theoretical dollar amount per common share one might expect to receive from a company's tangible book assets should liquidation take place.

Price-to-book ratios have been studied extensively, with some studies suggesting a low price-to-book can lead to a strong stock price rise in the future.

There are two caveats: What's worked in the past won't necessarily work in the future, and price-to-book generally doesn't measure financial services stocks well because of the nature of the financial services business.

For this week's screen, we searched for stocks with a price-to-book ratio lower than 1. (The market average is 1.5.) We eliminated financial services stocks as well as any stock with an S&P investment ranking of 3 STARS (hold) or lower.

There were 23 stocks returned by the screen, each with an S&P investment ranking of 4 STARS (buy) or 5 STARS (strong buy).

Company Ticker S&P STARS Rank (2/5/09)

Akamai Technologies AKAM 4

Arkansas Best ABFS 4

Chesapeake Energy CHK 4

Cimarex Energy XEC 4

D.R. Horton DHI 4

Dynegy DYN 4

GulfMark Offshore GLF 5

International Paper IP 4

Mariner Energy ME 4

Mirant MIR 4

National Retail Properties NNN 4

Neenah Paper NP 4

Office Depot ODP 4

OfficeMax OMX 4

Plains Exploration & Production PXP 4

Pride International PDE 4

Pulte Homes PHM 4

Red Robin Gourmet Burgers RRGB 5

Southwest Airlines LUV 4

Toll Brothers TOL 4

Tsakos Energy Navigation TNP 4


Valero Energy VLO 4

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