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.
|Stock Symbol||Company Name||P/B||ROE|
|CSWC||CAPITAL SOUTHWEST CORPORATION||0.70||17%|
|PRLS||PEERLESS SYSTEMS CORP.||0.91||10%|
|STLY||STANLEY FURNITURE CO.||0.76||47%|
|SUP||SUPERIOR INDUSTRIES INTERNATIONAL INC.||0.98||15%|