WHAT ARE WE LOOKING FOR?
Cheap stocks. Let's find the stocks with the lowest price-to-book-value ratios in the S&P/TSX composite.
MORE ABOUT TODAY'S SCREEN
Book value calculates a company's assets minus liabilities and then divides that by the shares outstanding. To find price-to-book-value per share, we divide the stock price by the book value per share. This ratio has its flaws. Sometimes the company's book value is subjective, clouded by items such as what brands or patents are worth. At other times, book value is underrepresented. For example, land is usually valued at the purchase price - but 20 years later, it might be worth a whole lot more than is recognized on the balance sheet.
All this means is that book value is a good starting point for value investors, but that more homework needs to be done to try to determine whether the market is underpricing the true value of a company's assets.
WHAT WE FOUND
We do this screen from time to time and it has turned out to be a decent barometer on the market. When the market was peaking in 2007, less than 10 names were trading below book value on the composite. About one year ago, more than one-third of the index was trading below it's stated assets. Last fall, that number was down to 33 names and now that is down to less than 20.
It's true that some names that were trading below book value last fall would have been dropped from the index but, still, this is a pretty good indication for value investors that the market is now trading at a fairly high level. A lot of the companies trading below book value now are losing money, which means a value investor needs to be pretty careful in finding bargains.