I'll admit it, when the market tanks, I'm not crazy about the red-washing of my portfolio. However, when stocks are falling day after day after day, I do get pretty excited that I may turn up some interesting bargains.
The majority of my investing sticks to the basics -- that is, finding great companies, buying them at reasonable prices, and holding on to them to benefit from their superior economics over time. And to be sure, when the market falls, there are better prices available on a lot of these great companies.
But as I've written before, I also maintain a portfolio of horribly battered bargain stocks -- that is, stocks that have been dragged all the way down to around half or less of their reported book value. Why would I bother with this? For one, value-investing forefather Benjamin Graham was fond of buying stocks based on low prices in relation to balance sheet metrics. If that's not enough, academic power-duo Eugene Fama and Kenneth French showed through extensive research that stocks with a high book-to-market ratio (the inverse of price-to-book) continually beat the rest of the market.
With that in mind, I found five new stocks by rummaging through the bargain bin.
Price-to-Book Value Multiple
Deutsche Bank (NYS: DB)
ArcelorMittal (NYS: MT)
E*TRADE Financial (NAS: ETFC)
Endurance Specialty Holdings (NYS: ENH)
ReneSola (NYS: SOL)
Source: S&P Capital IQ.
Let's dive right in for a closer look at these five laggards.
Am I betting against a Greece-sparked eurozone meltdown? Possibly. Or perhaps I'm just betting on the market's apparent view that Deutsche Bank is in line to report tens of billions in losses (far more than what it recognized during the worst of the financial meltdown). Or maybe I'm just hot on the idea that, just like the U.S. wasn't about to let Citigroup (NYS: C) go all supernova, Germany will be ready to stand behind its behemoth bank. Pick your poison -- in any case I like the risk-reward on Deutsche Bank at this price.
Last month I said that ArcelorMittal was at the very top of my buy list. And that was anything but hot air -- the stock is now part of my personal portfolio. In short, my reasoning was that ArcelorMittal is a great company with significant scale advantages and has a great leader who owns a significant stake in the company. Oh, and the stock is really, really cheap whether you're looking at book value -- as we are here -- or even more stringent measures like price-to-average 10-year earnings. Unlike most of the stocks I find in the bargain bin, this is one that I think can have a home in either a bargain-stock portfolio, or a portfolio of high-quality companies.
Talk about a fall from grace. From a shareholder's perspective, the distance that E*TRADE has traveled from where it was pre-crisis and where it is today can only be measured in light years. But what about a customer's perspective? Anecdotal evidence can often be misleading, but from the view of at least one customer (yours truly), the company delivers a very good experience that is worth paying commission rates that are decidedly not the lowest out there. Were the stock priced as if investors had any confidence in the company, I probably wouldn't be interested, but at this price I might be willing to bet that either the company gets its act together -- even a bit -- or a buyer is willing to step in for what is still a strong brand in the space.
Endurance Specialty Holdings
Endurance is not one of my very favorite specialty property and casualty insurers (I recently took a look at them here). However, it's a fine insurer and is even cheaper than those other cheap specialty P&C insurers. Investors who aren't fans of some occasional big swings in the bottom line may not fancy Endurance because insuring against big risks can mean big financial swings -- in the first six months of this year the Japanese earthquake and tsunami; the Christchurch, New Zealand, earthquake; the Queensland, Australia, floods; and tornadoes in the U.S. added a whopping $251 million to the company's loss expenses, and it was unprofitable over that period. Over long periods of time, though, I think these guys know what they're doing and so picking up shares at nearly half off book value is a steal.
I dig solar. I really do. But I have a problem investing in the space because, like other young, upcoming industries, there's a long way to go for all the companies involved and there will inevitably be new companies coming in that upset the status quo and steal market share, while companies that can't keep up will be culled. Technologies will change, fat will be trimmed, and while the industry as a whole will move forward, not everyone involved will. In the world of Internet search, do you think users of Yahoo!, AskJeeves, and Alta Vista saw Google moving in to gobble up the entire sector?
That said, I'm scratching my head over the valuation levels that investors have pushed solar stocks to lately. I will admit I have been long and wrong on ReneSola in my Motley Fool CAPS portfolio -- and taken quite a hit to my score as a result -- thanks to my view that it would be a good bet in general. I made that call back in June of 2009, when the stock was trading at a premium to book value. Now, with the stock trading at a small fraction of its book value, a lot less has to go right for investors to make out.
Rather than simply leaving it there, I'm going to add the stocks not already in my CAPS portfolio -- Deutsche Bank and Endurance Specialty -- to my portfolio to track how these picks do over time.
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At the time thisarticle was published The Motley Fool owns shares of Google, Citigroup, and Yahoo!. Motley Fool newsletter services have recommended buying shares of Yahoo!, Google, and Endurance Specialty Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributor Matt Koppenheffer owns shares of ArcelorMittal, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.
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