Chasing Value: Cheap Stocks by the Book

Posted Aug 16th 2010 12:00PM by Sheldon Liber
Filed under: Time Warner (TWX), Getting Started, JPMorgan Chase (JPM), Reliance Steel and Aluminum (RS), Chasing Value™, Stock Picks, Transocean Ltd. (RIG), Prudential Financial (PRU), Ameren Corp (AEE)

In case you need to be reminded to look closely at the books, today's poster boy for erroneous ledgers, Bernie Maddoff, should be a constant reminder. Furthermore, when you are looking at the books, remember that Benjamin Graham, mentor to "my pal Warren," advised buying stocks for less than their intrinsic value. And book value is the starting point in attempting to establish that.

Two weeks ago, I posted an update on my toxic stock picks. These were six unloved stocks where I felt the stage was set for market beating returns. The same is true again for today's market-beating group, although it is not the headlines that tied this group together, but their standout bargain metrics.

The following six stocks survived my primary screening based on book value and price to earnings ratio. This was followed by price to sales and price to cash-flow ratios. All of them have been hurt by the economy, and RIG was hurt by headlines as well and is the only stock that is also on my toxic stocks list, making it one of my favorites to outperform.

Ameren (AEE) Price to Book: 0.71, P/E (TTM): 10.05
Price to Sales (TTM): 0.87, Price to Cash-flow: 3.31
Last price: $27.58

Transocean (RIG) Price to Book: 0.71, P/E (TTM): 8.36
Price to Sales (TTM): 2.30, Price to Cash-flow: 4.07
Last price: $54.15

JP Morgan Chase (JPM) Price to Book: 0.89, P/E (TTM): 8.60
Price to Sales (TTM): 1.40, Price to Cash-flow: 2.92
Last price: $37.50

Prudential Financial (PRU) Price to Book: 0.94, P/E (TTM): 6.52
Price to Sales (TTM): 0.63, Price to Cash-flow: 6.70
Last price: $55.49

Reliance Steel and Aluminum (RS) Price to Book: 0.99, P/E (TTM):11.77
Price to Sales (TTM): 0.60, Price to Cash-flow: 7.19
Last price: $38.36

Time Warner (TWX) Price to Book: 0.99, P/E (TTM): 14.08
Price to Sales (TTM): 1.35, Price to Cash-flow: 3.52
Last price: $30.81

All of these are turn around plays and some will take greater positive economic data to scale their walls of worry than others, but as a group, the numbers scream value. I will follow the numbers and see if they do indeed outperform the S&P 500, which closed Friday 13, 2010 at 1,079.25.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He owns shares and options of RIG.