Book Value Bargainshttp://www.fool.com/investing/small-cap/2004/09/10/book-value-bargains.aspx Chuck Saletta
September 10, 2004
If investing is about anything, it's about valuation. Though the term connotes math geeks and spreadsheets to many, the idea is simple: Determine a "sticky" price -- a valuation -- that you believe a stock will eventually gravitate toward, and if that estimate is significantly greater than the current stock price, buy that stock. Describing some valuation methodologies as complicated would be an understatement, but valuation doesn't have to be complicated to be effective. One of the simplest methods is one of the best, in my opinion.
Just because it's trading below the firm's book value is no guarantee that a company's stock will rise. Companies trading under book value are often beaten down for good cause. But proponents of low price-to-book stocks believe that, on the whole, stocks trading below book value have felt more than their fair share of the market's wrath -- and that the market won't go on punishing them forever.
The cheap price of Life
But another company caught my eye: Presidential Life (Nasdaq: PLFE ) , a life insurance and annuity company. The company lost money in 2001 and 2002. The first three quarters of 2003 showed a return to profitability, and I saw no reason to believe that the full year would be any different. At the time, the company's book value was $16.38 per share, but its price was around only $14.05 per share. The company also sported a $0.10 quarterly ($0.40 annual) dividend, which it had maintained during 2001 and 2002. That dividend represented a better than 2.8% yield and was easily covered by its earnings throughout 2003, reducing the risk of a dividend reduction.
Looking at Presidential Life, I noted that it had returned to profitability, it had a decent and well-covered dividend, it maintained its dividend even while losing money, and it was trading for below its potential liquidation value. The value investor in me saw an offer I couldn't refuse, so I purchase