Looking for Value Stocks in 2014? Look Behind the Numbers

For investors looking for value stocks in 2014, it's important to look past the numbers and see the whole story behind the companies you're investing in. Let's take a close look at Berkshire Hathaway, American International Group, and Annaly Capital Management.

Jan 16, 2014 at 12:50PM

The stock market has come roaring back over the past few years. Not only was the S&P 500 up 32% last year, but it's up an astounding 51% since 2011. If you go back to the bottom of the recession in early March 2009, this is what you get:

^SPXTR Chart

^SPXTR data by YCharts.

For anyone who's been sitting on the sidelines, waiting for the "correction" that will certainly come eventually, this has been a painful lesson in how impossible it is to time Mr. Market. For value-oriented investors, it may seem hard to find "cheap" stocks. But don't give up hope.

There are values to be found out there -- and there are also stocks that could well be value traps. Let's take a look at American International Group (NYSE:AIG), Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), and Annaly Capital Management (NYSE:NLY) and see what we can learn.

Metrics that matter: The valuation and the story
Oftentimes, metrics like price to book value, or P/B, are used to find value in companies that are trading for less than either their typical valuation or that of peers. However, it's easy to get lost in the numbers and forget that these are real companies we're talking about. We must apply the context of the real world to any attempts at determining value.

P/B is commonly used to value financial companies like banks and insurance companies. Warren Buffett refers to P/B as a reasonable way to measure Berkshire Hathaway, and he sees a price of 1.2 times book value as compelling enough to buy back shares of the company. A recent share price of around $115 for the "B"-class shares pegs the company at about 1.29 times book value today.

While that's a bit too rich to compel Buffett to buy back shares, 1.29 time book value looks reasonable for individual investors:

BRK.B Price to Book Value Chart

BRK.B Price to Book Value data by YCharts.

While Berkshire shares currently trade around their June 2013 level, the P/B value has fallen by about 5% as Berkshire's net worth has grown based on acquisitions and investments. For a company like Berkshire, which has a solid base of both wholly owned companies and nearly $100 billion in shares of other public companies, that means more capacity to grow earnings over time, further compounding book value higher.

Back from the dead
Another company whose P/B ratio makes it look super cheap is AIG. AIG, of course, is still associated with the financial crisis, as its large bucket of credit default swaps wiped out about 90% of shareholder value when the company was essentially bankrupted and took a massive infusion from the Federal Reserve. To make a long story short, today's AIG, under the leadership of CEO Robert Benmosche, is a leaner and meaner company than the one the Fed rescued.

Today's AIG sports a P/B of 0.78, which is incredibly attractive when one looks at the long-term P/B ratio AIG has commanded:

AIG Price to Book Value Chart

AIG Price to Book Value data by YCharts.

AIG's P/B ratio has consistently stayed near 0.8 or below since 2010, so it's tough to know when -- or whether -- it will break out of this slump that makes it look more than 25% undervalued. Whether or not the market ever restores it to a P/B of one or more, today's AIG is a solid company that is doing a lot of good things for shareholders, like remaining disciplined in its core businesses and continuing to sell off noncore assets, beginning to buy shares back, and even reinstituting its dividend, though at a small level for now.

Higher interest rates bad for mortgage REITs?
Annaly Capital Management is one of the best-run mREITS, returning more than 441% to shareholders -- largely through its strong dividends -- since its founding. It has also carried a median P/B ratio of about 1.4 for most of that time, according to Fool analyst David Hanson. However, that doesn't mean today's multiple of 0.8 times book value makes Annaly Capital Management a steal.

What has changed? In a word, rates:

NLY Price to Book Value Chart

NLY Price to Book Value data by YCharts.

As the table shows, the company has lived in essentially one long period of declining mortage rates, meaning a steady line of customers looking to refinance to get a lower payment. However, that has changed, with the Fed beginning its "tapering" plan, which will lead rates to steadily increase for the foreseeable future.

How big will the impact of rate increases be? The Mortgage Bankers Association is forecasting refinance mortgages to drop a whopping 60% from 2013 to 2014.

Cheap versus value
It's just as important to consider the environment companies operate in as it is to look at the numbers. For AIG and Berkshire, both look to be fairly valued and well-positioned, while Annaly could be a value trap based on the mortgage environment going forward. The key lesson is to look beyond the numbers, whether you're looking for value stocks in 2014 or in any other year. 

What do you think? Share in the comments below.

The No. 1 Way to Lose Your Wealth Without Even Knowing It
You’ve fought hard to build wealth for you and your family. Yet one all-too-common pitfall could completely derail your dreams before you even know it. That's why a company The Economist hails as "an ethical oasis" has isolated five simple questions you must answer to ensure that your financial future is really secure.

Can you answer YES to all five of these eye-opening questions?
Click here to find out -- before it’s too late!


Jason Hall owns shares of American International Group and Berkshire Hathaway. The Motley Fool recommends American International Group and Berkshire Hathaway. The Motley Fool owns shares of American International Group and Berkshire Hathaway and has the following options: long January 2016 $30 calls on American International Group. 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. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers