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Top 20 Magic Formula Stocks by Price/Book Ratio

The next value metric we will add to the current Magic Formula list is the price-to-book ratio. Previously, we've covered Magic Formula stocks with the:

Price-to-book is one of the oldest and most intuitive value investing statistics. The "bible" of value investing, Benjamin Graham's The Intelligent Investor, uses the price-to-book ratio as the main criteria for finding undervalued stocks. Book value is the same thing as net worth: all of a company's assets, minus it's liabilities. The net worth is (ideally) what the company's value is when not adding a premium for things like future earnings power. Therefore, a company whose market value is below book value would seem to be an obvious bargain.

Through this series of articles we've also been using James O'Shaughnessy's study of mechanical investing strategies over 50 years, detailed in his book What Works on Wall Street. Buying stocks with low price-to-book ratio as the only criteria performed very well over the 50 year study period, behind only the price-to-sales ratio:

Stocks with Lowest:Annual Return
Price-to-Sales15.4%
Price-to-Book14.4%
Price-to-Earnings11.2%

Of course, there are a few things to be aware of when buying stocks selling below book value. For one, the book value will be calculated with accounting assumptions made for certain assets such as the worth of intangibles like brand names, patents, exclusivity contracts, and so forth. Also, for many companies the purchase price of acquisitions over the acquired company's book value (known as "goodwill") will be a major portion of assets on the balance sheet, even though it is not an asset that can be bought and sold. Some investors prefer to subtract intangibles and goodwill out from the total assets to get what is known as a "tangible book value". However, all of the book values used in the list below do not do this.

So, with no further ado, here are the 20 Magic Formula stocks with lowest price-to-book ratio:

TickerCompanyPrice-to-Book Ratio
TKTMTicketmaster0.18
CITPCOMSYS IT Partners0.31
IBASiBasis0.32
KNXAKenexa0.43
ISILIntersil0.43
MTWManitowoc0.55
TSCMTheStreet.com0.59
GTLSChart Industries0.59
PCRPerini Corp0.66
NOVNational Oilwell Varco0.67
ELOSSyneron Medical0.72
NOCNorthrup Grumman0.73
NWSNews Corp0.74
CYNOCynosure0.76
SHFKSchuff International0.80
DIVXDivX0.82
KGKing Pharmaceuticals0.83
OPTVOpen TV0.84
HURCHurco Companies0.84
GPXGP Strategies0.84

All 20 of these stocks sell below their stated net worth. Two of them are MagicDiligence Top Buys and a few others were given favorable reviews. As always, however, more research is required before trusting these ratios. For example, the top stock here, Ticketmaster (TKTM), has 63% of it's total assets in goodwill and intangibles. Subtracting these out leaves a tangible price-to-book ratio of close to 1.0 - still pretty cheap but not nearly as impressive as 0.18. On the other hand, Hurco (HURC) has less than 3% of assets in intangibles and goodwill, making it's valuation well below what the company is worth on a net asset basis, and probably worth a good look by value investors.

For the next and final article in this mini-series, we'll put all of the add-on metrics together, and create a list of Magic Formula stocks that rank highly when scored on each additional screen. Since Magic Formula stocks are cheap and high quality by design, this cumulative screen should help identify some of the very best MFI opportunities on a quantitative basis.

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Disclosure: Steve owns no stocks referenced here.

Joel Greenblatt and MagicFormulaInvesting.com are not associated in any way with this website. Neither Mr. Greenblatt or MagicFormulaInvesting.com endorse this website's investment opinions, strategy, or products. Investment recommendations on this website are not chosen by Mr. Greenblatt, nor are they based on Mr. Greenblatt's proprietary investment model, and are not chosen by MagicFormulaInvesting.com. Magic Formula® is a registered trademark of MagicFormulaInvesting.com, which has no connection to this website. The information on this website is for informational purposes only and solely represents the views and opinions of the author. No warranty is provided or implied as to the accuracy, completeness, or timeliness of this information. This information may not be construed as investment advice of any kind, nor can it be relied upon as the basis for stock trades. Alexander Online Properties LLC, the proprietor of this website, is not responsible in any way for losses or damages resulting from the use of this information. Alexander Online Properties LLC is not a registered investment advisor. All logos are trademarked properties of their respective companies.

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