America's Next Top Value Stock

Though value investors have been some of the most successful investors out there, finding good stocks at bargain prices is far from easy. Though markets aren't as efficient as some university professors may tell you, they generally do a pretty good job pricing stocks. So while there are good deals out there, you're going to have to break a bit of a mental sweat if you want to make sure that you're investing in the stock equivalent of Brad Pitt, not Kato Kaelin.

Fortunately for us, in the search for stock market values, we have the 135,000 members of The Motley Fool's CAPS community voting on which stocks are true stars and which are just posers. To gather some ideas I've dug up a handful of companies valued at less than twice their book value -- a measure often used by value investors. Below is a selection from the array of companies that fall into this category; you can run the same screen that I did on the CAPS screener.

Company

Book Value Multiple

1-Year Stock Performance

CAPS Rating
(out of 5)

AIG (NYSE: AIG  )

0.1

(95%)

***

Hercules Offshore (Nasdaq: HERO  )

0.5

(84%)

****

Solarfun Power

1.2

(58%)

***

Apache (NYSE: APA  )

1.9

(39%)

*****

Whole Foods Market (Nasdaq: WFMI  )

1.9

(24%)

**

Source: Capital IQ, a division of Standard & Poor's, Yahoo! Finance, and CAPS as of June 12.

As you can see, although these stocks all carry value-like multiples, the CAPS community obviously doesn't think that all are worthy of your investment dollars.

No twinkle in these stars
Frankly, I'm a little surprised that AIG is rated as highly as it is by the CAPS community. The company has been absolutely racked by losses and, thanks to the handouts it's taken from Uncle Sam, it's practically a branch of the federal government at this point.

Of course, as a long-shot bet, the potential payoff on AIG does look attractive. But looks can be deceiving. Although AIG reported $53 billion in shareholder equity at the end of the first quarter, more than $60 billion of AIG's equity account is preferred stock that's in the hands of the government. Some quick math shows us that backing that out leaves much less than zero for common shareholders -- not quite the screaming value it appears!

Whole Foods, which carries an even lower star rating than AIG on CAPS, seems to draw double-barreled criticism from the community. Many CAPS members think highly of the company, but aren't particularly enthralled by the stock's current valuation. Others have focused on the company's pricey goods and think that sales will suffer because of current economic conditions.

Like competitors Evergreen Solar and First Solar (Nasdaq: FSLR  ) , Solarfun has found itself out of favor with CAPS members. This isn't anything particularly new. The community has been skeptical about solar from the start, and has held the best ratings for a few companies in the industry, such as Suntech Power (NYSE: STP  ) and MEMC Electronic Materials (NYSE: WFR  ) .

A five-star is born!
I don't think I'd get too many arguments if I said that oil is important. If we can agree on that, we should be able to agree that the companies that provide the drilling services to get to the oil are important. Well, that's exactly what Hercules Offshore does. It provides drilling services to access oil in shallow water.

CAPS members have shown their approval of Hercules by slapping a four-star rating on it, although those four stars weren't quite enough to put Hercules over this week's top value stock: Apache.

Apache focuses on finding sources of oil and gas and developing wells. To get a better idea why CAPS members have been so positive on Apache, let's take a look at what CAPS All-Star brentvoss had to say when giving the stock a thumbs-up earlier this year:

Didn't pick the bottom. Never do. The future of oil and gas producers must be bright or the lights are going dim. We simply don't have a viable substitute of scale to replace them in the near future and global depletion rates are higher than previously thought. Much higher.

Make your vote count!
I've already given Apache an outperform rating in my CAPS portfolio, but what do you think? Do you agree that Apache could be America's next top value stock? Click over to CAPS and let the rest of the community know what you think. And while you're there, log your vote for the other stocks that you think should be in the running.

More CAPS lovin' Foolishness:

Suntech Power Holdings is a Motley Fool Rule Breakers selection. Whole Foods Market is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Matt Koppenheffer does not own shares of any of the 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. The Fool's disclosure policy -- which does nothing but monitor disclosures -- knows that boring can be beautiful.


Read/Post Comments (4) | Recommend This Article (15)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2009, at 12:23 AM, lawtony wrote:

    I think you did the wrong calculating about AIG common stock equity value

    as at 31 March, 2009 AIG announce common stock equity is USD52.69 Billion while no. of common shares outstanding is 2.69Billion. That is @19.58 per shares. But due to the Federal gov't preference shares series C & D covenants giving federal rights to exchange all the preference shares into 10.760 Billion no. of common stock for as little as US137million .

    Therefore the total common stock equity amount to USD.52.827 Billion will be distributed among total possible outstanding no. 13.45Billion of shares. And that is USD3.927 per shares.

    Here were the AIG 5 years historical performance started from 2001 and before the buble growing from 2006

    (in Million) 2005 2004 2003 2002 2001

    Book Value of

    common equity 86317 79673 69230 58303 49881

    income 10477 9839 8108 5729 4088

    Market price

    High 73 75 69 80 88

    Low 51 54 46 53 67

    The weighted average revenue return to common is 11%,one could expect AIG will earn 0. 43/shares (3.927x 11%) if the market is stable.

    If one buy now at USD1.53, his book revenue income return will be 28% for his lower than book value buying.

    The weighted average market price for the Highest is 3.4x and Lowest 2.4x. The same he could expected AIG shares will return to USD9.4 to USD13.35. Again, since you buy it at only USD1.53, the capital return will be 6.14x 8.73x

    While one must not expect AIG will return exactly to the above statistics status owning to management have been changed to government who always blamed to be the lowest efficient workers, we must not walk astray from the true historical figures into some fantasia of our own.

  • Report this Comment On June 16, 2009, at 12:48 AM, lawtony wrote:

    The above valuation is based on the father of investing Benjamin Graham's intrinsic value investing method. All the credit is to him though the figures are prepared by this humble of me.

    Has long position of AIG since yesterday.

  • Report this Comment On June 16, 2009, at 3:39 AM, TMFKopp wrote:

    lawtony -

    Your calculations will be correct when the US Treasury actually converts those preferred shares. Until then it's common equity holder beware -- the Treasury preferred shares have a massive liquidation preference which would almost certainly leave the common with zilch if AIG collapses.

    Additionally, your calculations suggest a best case scenario of sorts -- that is, that the book value actually stays where it is. In the past six months the company has reported over $65 billion in losses. How are you so sure that they're done?

    Considering this is a company that has been announcing massive losses, is already a ward of the state, and would surprise no one if it did end up in some sort of quasi-bankruptcy I'd want the promise of a pretty extraordinary return.

    I just don't see it.

    Matt

  • Report this Comment On June 19, 2009, at 11:02 PM, lawtony wrote:

    Matt

    AIG had already bankruptcy.

    When bankruptcy appears, there are two outcomes.

    One is liquidation, the second is ownership change hand.

    If you consider the debt AIG had leveraged, there will be 10 times effect more than Lenhman brothers if AIG liquidate. Also it is hard to see there will be any prospective institution could acquirer AIG without the Fed govt backup. So why backup an acquirer when the acquirer's book value is less than AIG's net book value?

    AIG did lost a great deal for the past year until 31 March, 2009. I do interest in how much AIG had lost, but I also concern the equity residual value.

    Like all the financial institutions had to face the most toughest situation during the past 9 months, the lacking of working capital killing them more than their lost. If their balance sheet assets were all cash, they won't worry.

    The Fed govt had already guarantee all AIG debt, therefore working capital will not be problem to AIG anymore. And AIG has time.

    Benjamin Graham said the longer a problem enterprises stay in the business and keep cleaning its balance sheet, the more percentage it could be recover to the net book value.

    p/s :

    By the covenant, the Fed govt will convert its preference shares once AIG has positive income.

    Funny is once AIG has positive income, who need Fed reserve to convert?

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