Finding Value Stocks

Finding Value Stocks

Now, this is going to be a surprise to you. But the only two positive sectors in the markets right now – from a momentum perspective – are basic materials and energy. What I mean here is that there’s been a wall of capital flowing into these sectors – and we’re witnessing the type of inflows that have fueled accelerations in price. Meanwhile, notable accelerations in selling have dissipated. Price is the trend. Price is your friend.

And when you look at the aggregate of a sector (the buying and selling), you maintain a solid knowledge of where to put your capital. But price momentum isn’t the only thing that matters in times like this. So too, does value. How can we find a few stocks that are “cheap” and offer some unique value in sectors that have already taken off? Let me show you.

Value Stocks Screening Metrics

Today, I’m going to offer you a pretty simple value screen. I’m going to focus on price-to-tangible book value. This is the company’s value compared to the hard assets sitting on its balance sheet. We’re going to set the screen to a rating of 1 or lower. 

At a price to tangible book value of 1, that would be the value of everything if the company was liquidated tomorrow for the value of those assets. Pretty simple. If it’s trading under its liquidation value, then it’s worth less than the sum of its parts. 

Now let’s add the Altman Z-Score. I talked about this on Tuesday with our monthly recap of the F&Z Score stocks. If the company has a Z-Score over 2.5, it faces a low probability of bankruptcy caused by a credit event. The Z-Score is a weighted average of five different metrics. The higher the score, the better this company is protected from financial calamity. 

So, let’s gather these stocks together in a simple screen. And because we are focused on American assets and American exchanges, we’ll keep our screen focused on companies that are based in the United States. Plus, we’ll ensure that these stocks do not trade over-the-counter. That will help ensure we keep liquidity in focus. So, what do we have in the screener today?

Value Stock Screen

Cheap Stocks With High Value Potential

Right now, we have two steel stocks that are trading right at a tangible book value of 1. And looking at them, we see a very known name in this industry: U.S. Steel (X). X trades at head scratching levels. Its PE ratio is under 2, its enterprise value to EBIT is also under 2. The stock has been on a very significant run over the last few weeks, climbing from under $19 to nearly $29. But with U.S. steel manufacturers poised to fill the gap on Ukraine/Russian production gap, the momentum may remain in place.

The Ohio-based Olympic Steel (ZEUS) trades at higher multiples to its rival X, but it’s still trading at low multiples. With stimulus money now spilling toward states, the steel sector will likely benefit as new infrastructure programs begin. 

Finally, I highlight NACCO Industries (NC), which reports earnings tonight. This company has a legacy business of coal procurement. Like many coal companies, it was left for dead. However, a massive surge in coal demand to fill the energy gap in the U.S. and Europe has put this sector back into focus. There’s a bonus, however. NACCO is a backdoor play in the growing lithium trade. The company contracts for lithium mining and it will be the subcontractors for the new Nevada mine at Thacker Pass – opened by Lithium Americas (LAC).

While everyone is focused on Lithium Americas, Albemarle (ALB), and Piedmont (PLL), NACCO stands to capitalize from the short-term need for coal mining and the shift toward lithium mining to meet exploding demand for electric vehicles and industrial batteries. 

Right now, these stocks are still trading under a TB/V of 1. And each of them will benefit from capital pouring into their respective sectors as institutions turn over rocks looking for value stocks.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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