Daily Press (Sunday)

Kraft Heinz and Capital One look good based on book value

- John Dorfman John Dorfman is chairman of Dorfman Value Investment­s in Boston. His firm of clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanval­ue.com.

I believe that the value approach to investing is in the early stages of a comeback, after a decade in retreat.

Roughly speaking and oversimpli­fying, value was usually a good stock-picking method from 1930 to 2013. Since then, growth and momentum investors have smiled, while value investors have wept.

A stock is a value if its price is low compared to some measure of its intrinsic worth. Book value, earnings and revenue are the three most common measures.

Once a year, I write about stocks that look great based on the price-to-book value ratio. Book value is a company’s net worth — the sum of its assets minus the sum of its liabilitie­s.

Beginning in 1998, I’ve written 24 columns about stocks selling at or below book value. My previous picks have averaged a 12-month return of 18.2%%. That decisively beats the Standard & Poor’s 500 Index, which was up 11.9% per year on average.

Bear in mind that column results are hypothetic­al and shouldn’t be confused with results I obtain for clients. Also, past performanc­e doesn’t predict the future.

The tabulation of past results includes a column I wrote in 2009, which was mistakenly omitted from previous tabulation­s. That year, my picks were up 70.7%, led by Dow Chemical (now Dow Inc.). The S&P 500 was up 42.4% as the market recovered from the Great Recession.

Here are five new picks of stocks I like, selling for book value per share or less.

Kraft Heinz

Kraft Heinz Co. (KHC), which makes the ketchup you use and the macaroni and cheese your kid eats, is selling for only 82% of book value. I consider anything under two times book to be reasonably priced and anything under book value to be cheap.

The stock has done poorly since 2017 and is down about

19% this year. But it increased its earnings by almost 12% in the past four quarters, has well-recognized brands (Kraft, Heinz, Velveeta, Philadelph­ia) and is held by Warren Buffett, who is widely considered the best living U.S. investor.

Also, Kraft Heinz yields about 4.8% in dividends, which is nothing to sneeze at.

Capital One

Capital One Financial Corp. (COF), best known as a major credit-card issuer, is selling for 74% of books value. I think that people fear a rise in credit card delinquenc­ies. A rise is indeed in progress, but it’s not bad so far. And Capital One has fewer delinquenc­ies than many of its competitor­s.

Based in McLean, Virginia, Capital One is the 12th largest bank in the U.S. ranked by assets, and the third-largest credit-card issuer. It is also a major auto lender.

For banks, I like to see a return on assets above 1%. Capital One has been in my preferred zone in

11 of the past 15 years.

This is a repeat pick from last year.

Gates Industrial

A mid-sized stock that looks interestin­g is Gates Industrial Corp. (GTES). Headquarte­red in Denver, the company makes power-transmissi­on and flow-control equipment. It has an all-star customer list including Chevron, Exxon Mobil, Ford, General Electric, Toyota and Volkswagen.

Gates has been profitable eight years in a row, with handsome profits some years and mediocre ones in others. The stock sells for just under book value.

Topgolf Callaway

Topgolf Callaway Brands Corp. (MODG) was formed by the merger in 2020 of Callaway Golf Co. and Topgolf Entertainm­ent Group. The company, which hails from Carlsbad, California, is the world’s largest maker of golf clubs and sells in some 70 countries.

The stock has been cut in half in the past five years, and now sells for about $10 a share, which is only half of book value. The

Altman index, a measure of bankruptcy risk, puts the company in the “distress” zone.

This is a high-risk situation, but I think the company will survive and might thrive. Golf has enduring appeal, and Callaway has managed 6% annual average revenue growth over the past decade (close to 9% last year).

Select Water

A small stock that intrigues me is Select Water Solutions Inc. (WTTR), out of Houston. It offers water treatment and recycling for customers in the energy industry. Among its customers are ExxonMobil, Chevron, Devon Energy and Occidental Petroleum.

Earnings have been spotty, but seem to be in an uptrend. The stock sells for exactly book value.

Last year

My low-price-to-book picks from a year ago fizzled, due mostly to a 27% loss in Fulgent Genetics Inc. (FLGT). Capital One lost 4%. On the plus side, WestRock Co. (WRK) gained 7% and Kelly Services Inc. returned 20%.

The net result was a loss of 1.08%, while the Standard & Poor’s 500 Total Return Index gained 13.42%.

Disclosure: Jingshu Zhang, a portfolio manager at my firm, owns Kraft Heinz personally and for his clients, and Capital One personally.

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 ?? RANKED BY ASSETS ?? Capital One Financial Corp., based in Virginia, is the 12th largest bank in the U.S.
RANKED BY ASSETS Capital One Financial Corp., based in Virginia, is the 12th largest bank in the U.S.

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