Capital One, Kelly Services selling below book value
People can argue all day about whether book value is a good gauge of a stock’s value.
I say it is, and I believe the results from this column tend to prove it. Book value is a company’s net worth — the sum of its assets minus its liabilities. It is usually expressed per share — that is, the total dollar figure divided by the number of shares outstanding.
Today’s is the 22nd column I’ve written on stocks selling for less than their book value. The average one-year return on the first 21 columns has been 16.6%.
I’ll take that return any time. It compares well with the average one-year return for the S&P 500 Total Return Index for the same 21 periods, which has been 10.4%.
Of the 21 sets of low-price-tobook picks, 15 have been profitable and 14 have beaten the S&P 500.
Last year, I had offsetting big gains and losses. Dorian
LPG (LPG) returned 105%, but Argonaut Gold Inc. (ARNGF) lost 88%. Graham Holdings Co. (GHC) had a small gain, and Loews Corp (L) had a small loss. In the aggregate, my selections returned 5.5% while the S&P 500 was down 17.3%.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
Capital One
Here are my new choices among stocks selling below book. I’ll start with Capital One Financial Corp. (COF), a banking company based in McLean, Virginia. It’s the 10th-largest bank in the United States, ranked by assets. You may know it from TV ads featuring the slogan, “what’s in your wallet?”
Compared to most banks, Capital One puts much more emphasis on credit-card lending. It is also active in car loans and commercial loans. It is relatively light on brick-and-mortar branches and on mortgage lending. Some of its branches are cafés.
The stock is cheap, selling for about five times earnings and just under tangible book value. Many people think a recession is in the offing; hence, they are unwilling to pay up for a bank with heavy credit card exposure.
Besides its cheapness, I like Capital One’s historical growth rate — roughly 7% a year for both sales and earnings over the past decade.
Kelly Services
Kelly Services Inc. (KELYA), based in Troy, Michigan, is one of the larger staffing companies in the U.S. (It recently ranked No. 4 in the industry, according to Statista.) Its stock sells for 0.53 times book value and 12 times earnings.
Kelly’s profitability has been disappointing. It lost money in three of the past 15 years, and hasn’t had a single year I would consider great. However, I think things are likely to improve.
You read a lot these days about companies having trouble finding qualified employees.
So, it seems to me that this should be a good time for staffing companies. After showing no revenue growth over the past decade, Kelly increased its revenue about 7% in the past year. That’s a start.
Fulgent Genetics
A nearly debt-free choice is Fulgent Genetics Inc. (FLGT). Based in Temple City, California, the company does genetic testing for doctors and hospitals. It branched out into doing COVID19 testing, and revenue from that source soon dwarfed its core business. Now, COVID-test revenue is ebbing.
That’s why the stock is so cheap, selling for only 0.9 times book value and less than five times earnings.
Core (non-COVID) revenue, though small, is rising. And the company has $571 million in cash and marketable securities. At its current price (around $39 a share), I think Fulgent is attractive.
It was recently featured on my casualty list, containing stocks that were knocked down in the latest quarter and that I think can recover and thrive.
WestRock
Cardboard boxes, anyone? WestRock Co. (WRK), out of Atlanta, is one of the nation’s largest producers of packaging, such as corrugated boxes and folding cartons. If people keep buying more of its goods on the internet, the need for shipping containers will keep growing.
I have occasionally played this theme via Packaging Corp. of America (PKG), but the reasoning is similar with WestRock. Packaging Corp. The former is more profitable, but it sells for three times book value while WestRock sells for 0.84 times book.
Of course, companies that sell below book value are cheap for a reason. They have problems, and everyone knows it. But in the stock market, that’s not necessarily bad. It’s often better to buy a cheap stock with palpable problems than an expensive stock with hidden ones.
Disclosure: One or more of my clients owns shares in Packaging Corp. of America.