The holidays are a time when many folks are hoping to find bargains at the mall -- or, if you're like me, online. But while retailers are dead set on getting you to open your wallet right now, it's also a great time to go bargain shopping for stocks.
Though most stocks have recovered substantially from the harrowing 2008/2009 crash, for those investors who like deep, dirty, and sometimes dangerous bargains, the financial crisis was a blessing. Among U.S.-based public companies worth $100 million or more, there were exactly nine that traded at half or less of their book value in 2007. Currently, there are 77 to choose from.
Cheap and ugly
Rare indeed is the stock that trades at less than half of its book value and looks like it's in great shape. More often, the company is getting knocked around in one way or another and, as a result, investors want nothing to do with its stock.
And, in fact, many of the companies being valued like this don't end up being good investments at all. Among those on the 2007 list:
Regent Communications filed for bankruptcy.
Sonus Pharmaceuticals acquired OncoGenex Technologies, changed its name to OncoGenex Pharmaceuticals (NAS: OGXI) , and the combined company is currently worth less than Sonus alone.
Tecumseh Products (NAS: TECUA) has continued to limp along, and the company is worth less than a third of what it was worth in 2007.
Now that's a home run
However, it's also possible to score big with these horribly beaten-down stocks. At the beginning of 2007, American Italian Pasta Company traded for just 0.48 times its book value. Over the next three years, shares rose from $9 to nearly $35. In July 2010, Ralcorp (NYS: RAH) agreed to buy the company for $53 per share.
With that in mind, here are a few of the many stocks that have been relegated to the bargain bin today.
Price-to-Book Value Multiple
Morgan Stanley (NYS: MS)
SunTrust Banks (NYS: STI)
Quad/Graphics (NAS: QUAD)
Kindred Healthcare (NYS: KND)
TravelCenters of America (ASE: TA)
Source: S&P Capital IQ.
Investors haven't been hot on banks or investment banks since the crash, but they've gotten even more skittish lately as debt problems in major European Union countries have sent tremors through that region. A bad outcome in Europe could be very nasty for banks, particularly investment banks like Morgan Stanley that have exposure to riskier assets.
The flip side though, is that Morgan Stanley is a top global investment bank. So far in 2011, it's No. 3 globally in terms of investment banking fees -- topping No. 4 Goldman Sachs (NYS: GS) -- and it has a strong, well-known brand. There's definitely the potential for an EU torpedo to hit Morgan Stanley, but if the cards come out right, investors jumping in now are getting a steal. I don't know that I'm totally sold on Morgan Stanley's stock yet, but I like it enough to add it to my Motley Fool CAPS portfolio.
As of early 2010, SunTrust no longer has the Warren Buffett stamp of approval. For a long time, the bank was a sizable holding for Berkshire Hathaway (NYS: BRK.B) . In early 2004, the insurance conglomerate owned more than $400 million of the stock. While the loss of the Buffett imprimatur smarts for sure, the numbers don't look that terrible at SunTrust. It'd be hard to say that the bank is in good shape, but it appears to be putting the pieces together post-crash, and the improvement in the bank's balance sheet may mean that Mr. Market is being overly pessimistic.
As for Quad/Graphics, let's see...it's an unprofitable print-services company in the age of the Internet. Sounds like a sure loser, right? Well, consider this: The company's print services include printing magazines like Sports Illustrated and Time as well as the catalogues for Cabela's (NYS: CAB) and Limited Brands' (NYS: LTD) Victoria's Secret. Additionally, though the net income line shows a $13 million loss for the last 12 months, the company produced $333 million in operating cash flow. Print is dying a slow death, but at this price, I may take a closer look at Quad/Graphics. In the meantime, it'll join Morgan Stanley in my CAPS portfolio.
Health care has been one of the few industries that's held up well in the recession and post...well, whatever it is we're in now. That said, running hospitals is a pretty unforgiving business. The returns that Kindred Healthcare produces aren't inspiring and haven't been for some time. I like the fact that it's a necessary service -- what else are you going to do if you get in some kind of accident? -- but the stock isn't my favorite on the list.
I've looked at TravelCenters on a few occasions and I have to admit I like the business. Maybe it's just because I'm a sucker for road trips and the company runs the TravelCenters and TA brand stops off major highways. Or maybe it's because I like the company's pitch that its sites are in great locations that are hard for competitors to match. For all of that, though, the company's results look terrible, and that suggests that the advantages I perceive may not be all that advantageous. Not to mention the fact that the company relies on the trucking industry that has been clobbered by the tough economic times.
On the bright side, the company has little debt, but that only will go so far if it can't produce consistent free cash flow. I want to like TravelCenters, but I also have the distinct feeling that grabbing the stock would be playing with fire.
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In part of my personal portfolio I keep a stable of bargain-basement stocks like the ones above. However, too many of these and it'll take a bottle of Ambien for you to get a decent night's sleep. For that reason, for the bulk of my portfolio I stick to high-quality companies that pay me through dividends and help me get rich slowly. The stocks in that part of my portfolio look a lot like the ones in The Motley Fool's free special report "Secure Your Future With 11 Rock-Solid Dividend Stocks." Grab your copy by clicking here.
At the time thisarticle was published The Motley Fool owns shares of Berkshire Hathaway and Limited Brands. Motley Fool newsletter services have recommended buying shares of The Goldman Sachs Group and Berkshire Hathaway. 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 Berkshire Hathaway, 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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