Genworth Financial Inc (GNW), Cliffs Natural Resources Inc (CLF): Why the Cheapest Stocks in the S&P Aren’t Necessarily Great Values

The S&P 500 has soared in the past four years, leading many to fear that the index is long overdue for a major correction. In times of trouble, value investors often look to stocks that trade at low valuations compared with their peers to provide a margin of safety from a potential downturn.

Yet judging stocks on a single valuation metric can lead to misleading conclusions that can prove costly. Today, let’s take a look at some of the least expensive stocks in the S&P on a price-to-book value basis, with an eye toward understanding why book value might not be the best way to judge whether these stocks are truly cheap.

The cheapest stocks in the S&P
On a book-value basis, financial stocks have had low book values for a long time. Genworth Financial Inc (NYSE:GNW) trades at just one-third of book value, while plenty of other insurance companies and banks offer price-to-book ratios of between 0.5 and 0.75. Yet during the financial crisis, investors learned just how inaccurate book values were. Massive writedowns of toxic assets proved necessary to reflect the actual value of those assets, and as a result, price-to-book ratios temporarily soared even as stock prices plunged.

Genworth Financial Inc (NYSE:GNW)

The big question going forward is whether the assets on financial-company balance sheets are now properly valued. Genworth Financial Inc (NYSE:GNW), for instance, still has potential mortgage-guarantee liability, and although the housing market has improved, Genworth Financial Inc (NYSE:GNW)’s low price-to-book reflects skepticism that book value is appropriate for its assets.

Steeling yourself for further declines?
A similar argument exists for other low-price-to-book stocks, including Cliffs Natural Resources Inc (NYSE:CLF), Alcoa Inc (NYSE:AA), and United States Steel Corporation (NYSE:X). Each of these three companies has a highly capital-intensive business involved in processing raw materials and producing either ingredients for fabricated metal production or the metals themselves. When you look at their balance sheets, all of these companies have substantial amounts of assets locked up in plants and equipment, much of which hasn’t been subject to depreciation yet.

Yet for these companies, the value of those plants might be far less than what they’re carrying on the books. Cliffs Natural Resources Inc (NYSE:CLF) and Alcoa Inc (NYSE:AA) have both had to idle some of their production facilities recently, while U.S. Steel has had some of its furnaces remain idle for years. Low price-to-book ratios reflect the belief among investors that those closures will persist for quite a while, making the true value of those production facilities far less than what the companies are carrying on their books.

Look beyond the book
Book value can be a useful metric, but it doesn’t necessarily reflect economic reality. Only by understanding the challenges facing each company can you truly decide whether book value is reflecting of intrinsic value — and therefore whether you should see stocks with low price-to-book ratios as actually being smart stock bargains.

Cliffs Natural Resources Inc (NYSE:CLF) has grown from a domestic iron ore producer into an international player in both the iron ore and metallurgical coal markets. It has also underwhelmed investors lately, especially after its dramatic 76% dividend cut in February.

The article Why the Cheapest Stocks in the S&P Aren’t Necessarily Great Values originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!