Bottom Quintile
Let’s look at the bottom 20% of stocks based on price/book. There are roughly 1500 US headquartered/non-financial public companies with market caps over $1 billion. About 20% for sell for less than 1.7x book. Only 5% sell below book.
My miserable life has been devoted to studying these low P/B companies. The Fama/French numbers are real. I can tell you exact spot I was standing at the University of Virginia when I was handed an early draft of this monumental paper. The low P/E guys were wrong, P/B is the important factor. Even today, P/B is still the best one number to measure a stock’s unpopularity. My goal has always been to try to find “average companies”, selling at below average prices. In 1995 about 80% of my portfolio would come from this universe. By 2015 that had fallen to maybe 50%, and today only about 20-25% of my portfolio is low price/book.
Maybe I am just getting grumpier as I get older. Price/book has eroded as a valuation metric to some degree as many companies are doing much larger buybacks (which quickly reduces book value). More importantly too many %$##%*%#@!# private equity firms have bought out the better companies in this universe.
Credit spreads are also at nearly all-time lows. Lower quality companies are usually cheapest when credit spreads are high. I think if you eliminate the crazy momentum stocks, the valuation differences between high and low quality stocks is at least normal today, but I think there is some significant chance low quality is too expensive relative to high quality.
Only, Tyson, Thor, Matador, Darling, Nutrien, and HF Sinclair sell for below 1.7x book, Corteva is close. My portfolio has a median price/book of 1.86x (stocks with negative book value are excluded), which is 60% below the S&P 500. My closest competitor is First Eagle Opportunity FESCX, sells at 1.3x book, but that includes 15% ugly low P/B financials. Making a rough adjustment I would guess the median FESCX non-financial is 1.5x book.
Maybe I should own more from this low P/B universe. Twenty years ago I could own this portfolio, today I like to mix in some higher quality ideas. These are my 25 favorite low price/book in rough order:
Krispy Kreme - DNUT - $9 - I think the McDonalds’s thing will work, a little worried about MAHA, management could be stronger
Srepan - SCL - $62 - solid, but perhaps too housing dependent
Royalty Pharma - RPLX - very smart guys, some risk in larger royalties
Titan International - TWI - $9 - everything going well, great small cap
Rogers - ROG - $88 - duPont wanted to pay over $200, some operating issues
Nucor - NUE - still statistically cheap, maybe STLD is better
Peabody Energy - BTU - $17 - very complicated with new Anglo deal, there are PE firms interested in buying minority stakes to meet AI power demands
Warrior Met Coal - HCC - $54 - a pure play in exporting met coal, if China ever reduces steel production, this could be a home run
Essential Utilities - WTRG - $36 - struggling with natural gas, AWK is better
Coty - COTY - $7 - well run, but China is the issue
Amkor - AMKR - $21 - semiconductor packaging, smart value guys own this
LKQ - LKQ - $38 - well run, maybe auto accidents are going down?
Ashland - ASH - $65 - lots of value guys own this, but I am not that excited, need to review recent investor day, proving to be more commodity oriented
Goodyear - GT - $8 - please make this stock go away, it is haunting me, maybe Michelin or Gentex is better
UGI - UGI - $32 - has bounced from the low 20’s, monitor
Macy’s - M - $14 - new management is floundering, but the franchise is real
Harley-Davidson - HOG - $26 - I think Brunswick is a better idea
IAC - IAC - $42 - a cheap way to own MGM, not sure on sports gambling
Neogen - NEOG - $10 - struggling, but cheap
Azenta - AZTA - $45 - I am more concerned about long-term lab spending
Foot Locker - FL - $20 - well run, but maybe some Nike issues
American Eagle - AEO - $14 - the most generic retailer, only 1 buy and 10 hold/sells, are expectations at the bottom?
Albamarle - ALB - $75 - maybe things are better in Chile?, will EV’s ever recover
OI Glass - OI - $12 - not sure about the upside
Treehouse - THS - $32 - generics, struggling to execute
Arcadia Health - ACHC - $45, mental health, guilty of fraud?