It is not easy to find stocks that are fundamentally cheap when the whole stock market is trading at near all-time high levels. When the market is moving up, most stocks, particularly the blue chips, are trading at relatively high prices.
You may think that a stock that has gone up by a large percentage may already be expensive, but some investors may still consider it cheap and so you may see the market continue to buy despite the high price. There are many reasons for justifying a stock’s valuation depending on how the market perceives it.
But when a stock is trading below its book value, you will know that there is either something seriously wrong about the company or it is simply being ignored by the market. The book value of a stock is the historical net worth of a company that is computed by deducting all its payables and debt from its total assets.
If the market value of a stock is below its book value, such stock could be a good candidate for value investing because if it is fundamentally stable, its share price will always be valued based on future market expectations. Eventually, the market value of the stock will always recover and trade above its historical book value.
There are almost a hundred listed companies in the stock market that are trading at a discount to their book values but not all are fundamentally sound. Be aware that the reason why some stocks fall below their book values could be due to negative market reactions to a recent company development. The damage on the stock price could be short-term or long-term depending on the situation.
In order to pick the right stocks based on its underlying fundamentals, you can screen them according to historical profitability as measured by return on equity, market capitalization and earnings growth.
Here are the top five undervalued stocks that are worth researching for possible value investing. Note that you need to carefully study the merits of the discounts offered by the stocks listed below, as these are not outright recommendations for investment:
1. House of Investments
Share Price: Php7.20
Discount to BV: 69 percent
House of Investments, Inc. is an investment holding company owned by the family of former ambassador and taipan, Alfonso Yuchengco, who recently passed away at age of 94.
The company has a diversified portfolio of business units that own car dealerships of Honda and Isuzu; a majority stake in listed company Engineering Equipment Inc (EEI); majority stakes in Malayan Colleges and Mapua Institute of Technology and investments in various companies such as RCBC Plaza and Manila Memorial Park Cemetery, to name a few.
House of Investments has an average return on equity of 15.78 percent for the last three years. However, net income of the company last year fell by 84 percent from Php1.4 billion to Php219 million due to losses by one of its subsidiaries.
Current share price of the stock offers a 69-percent discount to its book value of Php23.22 as of December 2016.
2. Century Properties Group
Share Price: Php0.52
Discount to BV: 60 percent
Century Properties Group, Inc. is one of the leading real estate companies in the Philippines engaged in development and sale of mid-and high-rise condominiums; leasing of retail and office space and property management in the last 30 years.
Among the notable projects that the company has completed in the past are Gramercy Residences, Knightsbridge Residences, South of Central, SOHO Central and Century City Mall. The company’s several ongoing projects include Trump Tower, Azure Urban Residences and Canyon Ranch to name a few.
The average return on equity of the company is 11.06 percent for the past three years. Last year, the company reported a 52-percent decline in net income due to lower revenues and higher interest expense.
Current share price of the stock offers 60 percent discount to book value of Php1.31 per share as of December 2016.
3. First Philippine Holdings
Share Price: Php72.50
Discount to BV: 54 percent
First Philippine Holdings Corporation is a multibillion peso company with diversified interests in power generation, real estate development, manufacturing, construction services and others.
About 81 percent of its revenues come from the sale of electricity through its subsidiary, listed company First Gen Corporation and its affiliates. The remaining comes from its other subsidiaries and investments such as listed company Rockwell Land, First Philippine Industrial Park and Manila Electric Company, to name a few.
First Philippine Holdings has average return on equity of 10.6 percent for the past three years. Last year, the company also reported 52-percent increase in net income. The company also regularly pays out cash dividends.
Current share price of the stock offers 54-percent discount to book value of Php158.40 per share as of December 2016.
4. Filinvest Land
Share Price: Php1.66
Discount to BV: 32 percent
Filinvest Land Inc. is one of the leading real estate developers in the Philippines, having developed over 2,500 hectares of land for the last 50 years. It is one of the largest nationwide residential developers, present in 45 cities and towns in 18 provinces and a market leader in the affordable and middle-income residential segments.
The company, which currently owns a land bank of 2,410 hectares for sustainable future growth, also has strategic investments in Festival Supermall and several IT buildings in Northgate Cyberzone within Filinvest City.
Filinvest Land has an average return on equity of 9.16 percent for the last three years. Last year, it reported a five-percent increase in net income at Php5.3 billion. The company also annually pays out cash dividend. Currently, the stock has dividend yield of 3.67 percent.
Current share price of the stock offers 32 percent to its book value of Php2.45 per share of December 2016.
5. Leisure and Resorts World
Share Price: Php4.25
Discount to BV: 29 percent
Leisure and Resorts World is the leading retail gaming company in the Philippines that provides multi-gaming platforms and products. The company operates professional bingo games with 35-percent market share. It also operates online gaming as well as casino and property ventures.
The company has an average return on equity of 17.18 percent for the last three years. Last year, it reported 4.4 percent increase in net income to Php1.3 billion. Leisure and Resorts World also pays annual cash dividends regularly. At current share price of the stock, its dividend yield stands at 3.29 percent.
Recently, the company sold its 30 percent interest in City of Dreams under its lease and licensing agreements to Belle Group for Php5.09 billion. The company intends to use the proceeds for expansion of its other gaming ventures.
Share price of the stock currently offers 29 percent discount to its book value of Php6.01 per share as of December 2016.
Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice firstname.lastname@example.org or follow him on Twitter @henryong888