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Professor Aswath Damodaran's Modified Low Price-to-Book Screen
Posted by: Mark Lin (IP Logged)
Date: November 9, 2012 10:48AM
Aswath Damodaran is a professor of finance at NYU Stern. He is the author of several widely used academic and practitioner texts on valuation, corporate finance and investment management and is regarded as an authority on valuation.
He has also written books about investing, notably, "Investment Philosophies and Investment Fables." In Chapter 4 of "Investment Fables: Exposing the Myths of 'Can't Miss' Investment Strategies," he discusses low P/B stocks.
He found the following issues with low P/B stocks:
- Low book value multiples may be well-deserved if companies earn and are expected to continue earning low returns on equity.
- Transactions costs associated with buying stocks that trade at low prices are often much higher than average or high priced stocks.
- Higher returns earned by low price to book stocks can be explained by the fact that they are riskier than average.
He suggested the following improvements to the traditional low P/B screen (P/B< 1):
- Minimum return on equity of 10% (valuation mismatch with high ROE stocks trading at low P/B)
- Minimum price constraint of US$2 (to decrease transactions costs)
- Beta< 1.5 (low risk in the CAPM sense)
- Debt to capital ratios< 70% (low financial risk)
The following stocks passed the Damodaran Modified Low P/B Screen:
All the stocks had zero debt, with some usual suspects which appeared in the Martin Whitman screen.
Stocks Discussed: CSWC, HGG, MAXY, PRLS, STLY, SUP, VRNM,