Early in his career, Warren Buffett (Trades, Portfolio) was able to make a name for himself (as well as millions of dollars in profit) by investing in stocks trading at single-digit earnings multiples and below book value. Plenty of other value investors have also made a fortune following this strategy, but with the market trading at all-time highs, are there any deep-value opportunities left?
To answer this question, I decided to conduct a deep-value stock hunt in an attempt to try and uncover some deeply discounted securities that might be attractive value investments in the current environment.
To start, the only criteria I have is for the equities to be based in the U.S., with a U.S. revenue base. The securities must also be trading at a single-digit price-earnings (P/E) multiple, preferably below eight, and a price-book (P/B) ratio of less than one.
One company that immediately shows up on this screen is Investors Heritage Capital Corp. (IHRC, Financial). Trading over the counter, Investors Heritage has a market capitalization of $19.6 million, an enterprise value of $19.4 million and currently trades at a trailing 12-month P/E of 7.9. At a price of $17.7 per share, the shares are trading at a price to tangible book value of 0.3. So straightaway this company looks cheap, but why is the valuation so depressed?
Heritage owns Investors Heritage Life Insurance Co., Investors Heritage Printing Inc. and Investors Heritage Financial Services Group Inc. The company is a financial services business with fingers in many pies. Unfortunately, over the past five years, revenue has declined at a compound annual rate of 16.1% and operating profit is lumpy. Still, it looks as if there could be value to be found in the company’s balance sheet. It has a total asset base of $580 million (year-end 2016), most of which is investments for life policies. Total liabilities are $523 million, giving a shareholder equity of $56 million compared to a market capitalization of $19.6 million. There are almost no intangibles on the balance sheet.
Growing through acquisitions
Next up is logistics and manufacturing company Janel World Trade Ltd. (JANL, Financial). Janel is an exciting company because for four of the past six years, it has made a loss. It appears, however, its fortunes have made a dramatic recovery in the past two years.
After making several select acquisitions, revenue rose from just under $50 million in 2014 to $75 million in 2015. Earnings per share increased from -50 cents to $1.1 in 2015 and $4.80 in 2016. Other operating metrics also dramatically improved.
Return on assets increased to 11.4% for 2016, and free cash flow per share came in at $1.50. Based on these trailing 12-month figures, the company looks quite cheap. The shares are trading at a historical P/B of 1.7 and a P/B ratio of 0.4. According to the company’s 10-Q for the six months ending March 31, these improved performance figures have continued. For the period, net cash provided by operating activities came in at just under $1 million, of which $130,000 was reinvested operations and $1.035 million was used to pay down debt. Revenue fell 18% during the period but net profit increased fourfold from $50,000 to $246,000. Earnings per share came in at 35 cents on a diluted basis for the period. The company is seeking further acquisitions to boost growth.
Growth on the horizon?
A final pick is CCOM Group Inc. (CCOM, Financial). Trading at a trailing 12-month P/E of 7.8, the company initially looks cheap. The shares are also trading at a price to tangible book value of 0.6. CCOM is engaged in the distribution of heating, ventilation and air conditioning equipment, parts and accessories.
Over the past five years, growth has been sluggish, revenue has hardly budged and the operating profit has remained around the $1 million per annum mark. Unless management can reignite sales growth, this might be one company that is stuck with a low valuation for the foreseeable future. That said, there might be value to be found on the balance sheet.
Disclosure: The author owns no stocks mentioned.