Heinz Tomato Ketchup, one of the best-selling products at Kraft Heinz. (Photo illustration by Scott … [+]
I believe the value approach to investing is in the early stages of a comeback, after a decade of decline.
Basically, and oversimplifying, value was generally a good method of stock picking from 1930 to 2013. Since then, growth and momentum investors have smiled, while value investors have cried.
A stock is valuable if its price is low relative to some measure of its intrinsic value. Book value, earnings, and revenue are the three most common metrics.
Once a year I write about stocks that look great based on price-to-book ratio. Book value is the net worth of a company – the sum of its assets minus the sum of its liabilities.
Since 1998, I have written 24 columns on stocks selling at or below book value. My previous picks have averaged a 12-month return of 18.2%. This significantly beats the Standard & Poor’s 500 index, which has increased by 11.9% per year on average.
Keep in mind that column results are hypothetical and should not be confused with the results I get for clients. Additionally, past performance does not predict the future.
The table of past results includes a column I wrote in 2009, which was mistakenly omitted from the previous tables. That year, my picks rose 70.7%, led by Dow Jones.
DOW
Here are five new stock picks that I like, selling at book value per share or less.
Kraft-Heinz
Kraft Heinz Co. (KHC), which makes the ketchup you use and the macaroni and cheese your child eats, is selling at just 82% of its book value. I consider anything less than 2x book value to be reasonably priced and anything less than book value to be cheap.
The stock has performed poorly since 2017 and is down about 19% this year. But it has grown profits nearly 12% over the past four quarters, has recognized brands (Kraft, Heinz, Velveeta, Philadelphia) and is owned by Warren Buffett, widely considered the best American investor alive.
Additionally, Kraft Heinz yields around 4.8% in dividends, which is nothing to sneeze at.
Capital one
COF
COF
Capital One Financial Corp., better known as a major credit card issuer, is selling at 74% of book value. I think people are worried about an increase in credit card delinquencies. An increase is indeed underway, but it’s not bad so far, and Capital One has fewer defaults than many of its competitors.
Headquartered in McLean, Virginia, Capital One is the 12th the largest bank in the United States ranked by assets and the third largest credit card issuer. It is also a major auto lender.
For banks, I like to see a return on assets above 1%. Capital One has been in my favorite area for 11 of the last 15 years.
This is a repeat choice from last year.
Industrial Portals
Gates Industrial Corp. (GTES) is a mid-sized stock that looks interesting. Headquartered in Denver, Colorado, the company manufactures power transmission and flow control equipment. It has a list of high-profile clients, including Chevron
CLC
GE
Gates has been profitable eight years in a row, with strong profits in some years and mediocre profits in others. The stock is selling just below its book value.
Topgolf Callaway
Topgolf Callaway Brands Corp. (MODG) was formed from the 2020 merger of Callaway Golf Co. and Topgolf Entertainment Group. The company, from Carlsbad, California, is the world’s largest manufacturer of golf clubs and sells its products in some 70 countries.
The stock has been cut in half over the past five years and now sells for about $10 a share, which is only half of its book value. The Altman index, a measure of bankruptcy risk, places the company in the “distress” zone.
This is a high risk situation, but I believe the business will survive and could thrive. Golf enjoys enduring appeal, and Callaway has managed average annual revenue growth of 6% over the past decade (nearly 9% last year).
Select water
One small stock that intrigues me is Select Water Solutions Inc. (WTTR), based in Houston, Texas. It offers water treatment and recycling to customers in the energy sector. Its clients include ExxonMobil
XOM
DVN
OXY
Profits have been uneven, but appear to be trending upward. The stock is selling exactly at its book value.
Last year
My cheap picks from a year ago fizzled, mainly due to a 27% loss at Fulgent Genetics Inc. (FLGT). Capital One lost 4%. On the plus side, WestRock
WRK
The net result was a loss of 1.08%, while the Standard & Poor’s 500 Total Return Index gained 13.42%.
Disclosure: Jingshu Zhang, a portfolio manager at my firm, owns Kraft Heinz personally and for clients, as well as Capital One personally.