In the recent market upset, some stocks have plunged to levels not seen since the financial crisis. Therefore, now could be the time for value-hunters to start looking at these deeply discounted securities.
With this in mind, I've screened the market for stocks that look cheap after recent falls. These are companies that are trading below their net tangible asset value. I've also tried to stick with companies that have strong balance sheets, which should allow them to navigate the current economic slowdown.
Any resource, energy and financial companies have been excluded, as it is difficult to determine the tangible book value of these businesses.
Deep discount
The first company I'm going to highlight is Air Lease (AL, Financial).
Shares in this business have plunged over the past few weeks due to its exposure to the airline sector. The company is principally engaged in purchasing new commercial jet transport aircraft directly from aircraft manufacturers and leasing those aircraft to airlines across the world.
As governments have bought in travel bans, airlines have started to warn that they could go out of business. This is bad news for Air Lease, which uses a lot of debt to fund its operations. If carriers default on their obligations, it could push the company out of business.
However, what attracts me to the company is its valuation. It is currently dealing at a price-to-tangible-book ratio of 0.3. Its net debt to asset ratio is 60%. That's high, but these aircraft have multi-decade lifespans. The airline industry might be in for a rough ride over the next six to 12 months, but the long term outlook for the industry is bright.
If Air Lease can survive the current market, I predict that the stock could ultimately return 100% to 200% from current levels.
Government stimulus
Granite Construction Inc (GVA, Financial), a $475 million market cap construction business, was forecasting mid-single-digit consolidated revenue growth for 2020.
As of yet, management has not revealed if the current situation will have a significant impact on operations, but the public and private sector business is well-placed to manage any downturn.
At the end of its last fiscal period, the business had net cash on the balance sheet of $30 million, that's not much compared to group revenues of $3.3 billion for 2018. Still, it means the business has some fiscal headroom.
Granite's strong balance sheet will help it stay afloat through the uncertainty. When the economy starts to pick up again, it's likely the business will be able to profit from any government-sponsored stimulus.
These prospects do not seem to be reflected in Granite's current valuation. After recent falls, it is dealing at a price-to-tangible-book ratio of just 0.5. With $865 million of net fixed assets and $432 million in cash, the company's book value seems reliable.
Online sales growth
The final company I'm going to profile in this piece is Signet Jewelers (SIG, Financial).
Unlike many of its peers, Signet has been coping reasonably well as the retail market has changed over the past few years. Sales have grown from $4.2 billion in 2014 to $6.2 billion for 2019.
The company has been able to buck the trend by investing heavily in e-commerce. This is now paying off. For the nine weeks ended Jan. 4, same-store sales increased 2% across North America physical stores but 13.5% online.
These numbers suggest the company's outlook is not as dismal as the market seems to believe. After recent declines, the stock is trading at a price-to-tangible-book ratio of just 0.5. Net gearing is a bit on the high side at 36%, but debt to total assets is a more conservative 18%.
Disclosure: The author owns no share mentioned.
Read more here:
- Warren Buffett May Ramp Up Berkshire Stock Repurchases
- Using Walter Schloss's Approach to Search for Value
- Finding Value Stocks After Recent Market Declines
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