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stockmktdouble (26.61)

PRICE to BOOK RATIO

Recs

6

April 07, 2013 – Comments (1) | RELATED TICKERS: AOL , AVTI , AFL

Ben Graham, the definitive value investor and Warren Buffet's mentor was a big proponent of a low price to book ratio when selecting stocks.

Using the years 2000-2010, (a really good 10 year period of time to test any theory because there were 2 major stock market meltdowns during this period) the return on investment on average for stocks with a price to book of less than 2 is 14%, nearly double the return of the market over the same period of time. Furthermore, the roi on stocks over 2 is 2.4%.

 So just for fun, using the google screener, I created a simulated portfolio of 4 pretty well known companies with a price to book of less than 2. Here's the list and their price to book ratios:


Company Name              Symbol          P/B            Stock Price
1. Ace Limited                 (ACE)          1.10               88.98
2. Aflac                           (AFCE)        1.45               49.49
3. AOL                           (AOL)           1.38               38.62
4. Activision Blizzard       (ATVI)           1.42               14.43


First, let me just say that these are picks solely based on 2 criteria-a low price to book ratio and the company being relatively well known. These are the only criteria, but it serves the purpose. Occasionally we can check in to see how the simulated portfolio is doing versus the S&P, which currently stands at l553.28.

I am curious to see how this goes. Periodically we'll check the p/b on these stocks to see that they still remain below 2, if not, we will will sell them and replace them with some other stocks that meet the criteria. I plan on tracking it over the next 12 months and see what happens.

One other thing, this experiment is not an endorsement of these companies, although they could be. I personally would start by checking out the story behind the companies first and then if I liked the story, I would then do some further research on the financials before ultimately making a decision.

Hopefully this helps put another tool into your arsenal so that you can achieve the highest returns possible. 
If value investing is your thing, I highly recommend the book, written by the master himself, Benjamin Graham, Intelligent Investor: The Classic Text on Value Investing by Graham, B (Google Affiliate Ad)



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1 Comments – Post Your Own

#1) On April 08, 2013 at 7:25 PM, ChrisGraley (29.87) wrote:

Without any research, I would expect Aflac to rise to the top of that list. They are the only ones with a slight moat.

Ace is slowly becoming the Radio Shack of hardware stores. I have one 2 mins from where I live, but will drive past it another 15 mins to Home Depot in most cases.  I will only stop at ACE to get minor things that don't cost much. ( Like when I need 1 or 2 nuts, bolts, or washers.) I can survive a big mark-up on parts that cost a dollar or two.

AOL is a company without a business model. If they try really hard and get lucky they can be like Yahoo. Yahoo doesn't even want to be Yahoo right now though.

 ATVI has risen from the dead before, but retail computer games are dead, console games are dying, and the competition is fierce on the market that is left. Unless they morph more into apps and online games, they are in for some more pain.

 

Sometimes cheap, is just cheap for a reason. 

 

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