There’s more to value than a low price-to-earnings multiple, however. Dawn Alston Paige, a portfolio manager with Loomis Sayles in Bloomfield Hills, Michigan, says she looks for “fallen angels”-companies the market has abandoned or ignored, provided there’s some reason for the stock to turn around and make money (see “Scavenger Hunt,” Moneywise, June 1999). If management can increase earnings, along with a cheap P/E, she’s likely to give the shares a second look.
“We’re always looking for cheap stocks, but we’re also looking for something that will ultimately help the shares gain value,” Alston Paige points out. “Value investing rules help us choose stocks, but we’re also looking for a catalyst to help get things going.”
Then there’s Eley, who is looking to cushion his investments from as much risk as possible. Eley says a low P/E is nice, but he’s also looking for a sizable dividend yield and a low price-to-book value to signal a good time to buy shares. “When we look at stocks, we first like to ignore earnings growth,” he says. “That way, we’re choosing a company that will make us money even if its profits don’t increase. Then, if earnings increase, we get a nice extra boost for our investment.”
In all, value managers will likely look at four important figures to help decide whether they should invest in a stock and when they should take a stake. They are, in order of importance, price-to-book value, price-to-earnings ratio, return on equity and dividend yield.
Price-to-book value: a measure of a company’s rock-bottom worth. Look for a price to book of 4 or under.
Eley and Alston Paige say that the price-to-book ratio is one of the most important things they’ll look at when mulling over a stock. Simply put, it’s a good measure of a company’s bare-bones value in relation to its current stock price. By
calculating it, professionals know how much the stock market values a company’s assets-how much cash its buildings, factories and office equipment could be expected to bring if operations were shuttered and everything sold off.
Historically, the S&P 500 has ranged between a price-to-book of 2 and 3.5; in today’s inflated market, the index’s average is now a bloated 7 to 8. As a value investor, Eley says he’ll normally shoot for a 33% discount to the market, or a price-to-book of 1.5 to 2.5. These days, though, with stock prices climbing ever higher, Eley’s portfolio has followed suit, and now has risen to an average price-to-book of 3.5 to 3.7. That figure is high by his standards, but nevertheless is at a steeper discount to the market than usual. Using this criteria, hydraulics concern Lafarge Corp. (NYSE: LAF) has a book-to-value ratio of 1.92, definitely a bargain compared with the market.
Price-to-book value figures can be found on the Web at sites such as Zacks Investment Research (www.zacks.com). Most screening sites, such as DailyStocks (www.dailystocks .com) and Marketplayer (www .marketplayer.com), will also allow you to plug in figures to set your price-to-book limits.