With these stocks, less is more

July 01, 1996|By Scott Schnipper | Scott Schnipper,BLOOMBERG BUSINESS NEWS

WORRIED THAT the six-year bull run carried stock prices too high? Maybe you should relax and adopt an investment approach that one of its practitioners calls "pretty sleepy."

It's buying shares priced low in relation to their book value, or net worth or liquidation value, if you prefer. Disciples say the strategy will let investors profit if prices keep rising -- but offers the prospect of owning stocks that will fall less than the rest if the market tanks. Meantime, these "cheap" stocks often are takeover targets.

William Lippman, who heads the $630 million Franklin Balance Sheet Fund, buys only shares that sell for less than their book value.

"What we're trying to do is buy a dollar's worth of assets for 80 cents," Lippman said. "When you get a good company selling for less than net tangible value, they could sell everything and still give you more money than the market is valuing them at."

If a stock already sells at a 20 percent discount to its book value, chances are it won't fall much further if the whole market drops. "You're less likely to get clobbered, because they have already been," said Lippman, who joined the securities industry in 1955.

Since the end of 1993, Lippman's Balance Sheet Fund gained 42.1 percent, lagging the 52.5 percent advance in the benchmark Standard & Poor's 500 Index. The fund recently had the lowest ratio of price-to-book value of 2,056 diversified mutual funds tracked by Morningstar Inc.

Nick Whitridge, who manages $545 million at Babson Val-ue Fund and Babson Shadow Fund, has the same philosophy.

He limits his stocks to those that sell for less in relation to net worth than the average share in the Standard & Poor's 500 Index. Currently, that average share trades at 3.7 times book value.

Whitridge is the one who calls this strategy "sleepy," but he also says, "It's very low-risk."

Lippman says he doesn't care if a stock he buys continues to trade at a discount to book value -- so long as the company keeps increasing its net worth by boosting earnings.

American National Insurance Co. "is that kind of company," Lippman said. "It's probably sold below book for as long as you can look back, and it may well sell below book forever, but we make a lot of money on it."


Other Lippman holdings include Total Petroleum (North America) Ltd., USLife Corp., Crown Central Petroleum, Home Beneficial Corp., Aztar Corp., Affiliated Community Bancorp and Little Switzerland Inc.

The Balance Sheet Fund will usually sell a stock once it rises to 20 percent over book value, Lippman said.

Connoisseurs of book value will never go for a Coca-Cola Co., which sells for almost 22 times its book value. And don't even think about high fliers such as Iomega Corp., selling for 49 times book, or Presstek Inc., costing 44 times book.

"People have built-in high expectations for those companies," Whitridge said. "For the companies we deal in, nobody has built in any expectations."

If stocks hit an air pocket, and an investor holds stocks selling at or close to book value, "you don't have exposure to the huge downdraft we've been seeing in some stocks," Whitridge said.

Companies with stocks selling for less than or close to book value are not only cheap; often, they operate niche businesses that don't get much attention from Wall Street brokerages.

Because they wouldn't dilute earnings of an acquiring company the way a company selling at 20 times book value would, cheap price-to-book stocks are also more likely to be taken over.

High margins

Whitridge points to his holding in Kmart Corp. as proof. Kmart was his worst-performing stock in 1995 and his biggest gainer in 1996. Back in January, Kmart sold for as little as $5.75 a share, even though its book value was 86 percent higher at $10.69.

"Everybody hates [last year's] losers," Whitridge said.

Last month, Standard & Poor's Corp. searched for companies with high profit margins whose stocks sold for no more than 1.1 times book value.

Among the companies that cropped up on the firm's radar screen: Atlantic Energy Inc., Centerior Energy Corp., Old Republic International Corp., RCSB Financial Inc., Safeco Corp., Shandong Huaneng Power Co. and Unicom Corp.

If you want to stop worrying, you might take a look.

Pub Date: 7/01/96

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