These Low P/B Stocks are on Sale

Cigar Butt Investing

Benjamin Graham, the father of value investing was known for buying stocks on the cheap. Buffett called them cigar butt stocks.

These are stocks that are unloved. Stocks that do not offer sexiness. Stocks you cannot boast about to your friends for fear of being called crazy. These are the stocks that a homeless guy will pick up and give one last puff. The funny thing is, if you puff away at enough of these butts, you can make some generous profits.

Now you may be asking who on earth would buy such stocks, but back in the early days of Warren Buffett's career, these were the types of stocks, he invested in. His most famous cigar butt purchase must be Berkshire Hathaway.

Low P/B Companies

The low PE screen to find cheap stocks is widely used and often referred to as a method to find cheap stocks, but I much prefer a low P/B screen as it is based on assets rather than GAAP earnings.

A company selling for a P/B of less than 1 is considered to be a company with no growth or potential. A company that is subject to difficulty and bankruptcy. However, this is not always the case.

Take for instance OM Group, Inc. OMG a producer of chemicals and advanced materials. The company is currently trading at a P/B ratio of 0.98. If you remove the intangibles from book value, the Price to Tangible book value then becomes 1.6. This is still a very low number and shows that the company is trading for a price just barely above its tangible assets.

Imation IMN is a maker of CD's, DVD's, disks and other optical drives to store data. The company has traded at a low P/B for some time. With the consensus that DVD's and other optical drive media are set to be become extinct, IMN has been lagging the general market for quite some time. Its current P/B is 0.45 and the price to tangible book value is at 0.7. For a company such as IMN, the company is valuing the business less than the assets. A prime example of a potential one puff remaining cigar butt.

If IMN was to declare bankruptcy today and liquidate, shareholders would actually see their share price go up as the tangible company assets are worth more than the current share price.

Pharmerica PMC services healthcare facilities and provides management pharmacy services to hospitals. P/B just makes the cut at 0.99 with a price to tangible book value of 2.4. Not as cheap as the first two companies but seeing as how the P/S for PMC is at 0.2 and 4.9 times its Free Cash Flow, the company is cheap when compared to book value and free cash flow.

Low P/B companies are usually small caps and may not be an ideal fit for your portfolio, but with a basket of low P/B stocks, the potential for market beating gains is always there. Just because a stock is out of favor, it should not be discounted.

Jae Jun runs Old School Value, a value investing service providing free investing spreadsheets as well as premium intrinsic value calculators, stock analysis and value stock screens for the DIY investor. He writes a weekly Tuesday column for Benzinga.