Value investors are always looking for stocks that are undervalued, but determining the true value of a stock can be tricky. Investors must consider elements such as earnings potential, growth rate, debt levels and other metrics to figure out how much value a share of stock holds. But is there a simpler way to identify undervalued stocks?
One of the simplest ways to identify the value of a stock is by its price to book ratio (P/B). The price to book ratio is calculated by dividing a company’s market capitalization by the combined value of all the company’s assets.
In other words, stocks with a P/B under 1.0 are selling for less than the value of the company’s assets.
Here are five financial stocks with P/Bs under 1.0, according to Finviz.
1. Citizens Financial Group Inc CFG 1.49%: Citizens currently sports a 0.68 P/B. The stock is trading down more than 3 percent so far this year.
2. American International Group Inc AIG 0.26%: AIG stock currently trades at a P/B of 0.72. Shares of the insurance giant are also down more than 2 percent tear-to-date.
3. Bank of America Corp BAC 0.71%: After falling more than 13 percent so far on the year, Bank of America’s stock now trades at a 0.72 P/B.
4. Regions Financial Corp RF 0.86%: This regional bank is also trading for less than the value of its assets after a 12.4 percent drop so far in 2015. Regions’ current P/B is 0.78.
5. Citigroup Inc C 0.37%: Rounding out the list is Citigroup. Despite selling off many of its assets since the financial crisis, Citigroup stock still trades at a P/B of only 0.78.
What’s The Catch?
Any time an investment looks too good to be true, it’s a good idea to look for caveats. In this case, several of these companies share a common theme: investors do not trust them.
For Citigroup, Bank of America, and AIG especially, many investors got burned horribly during the financial crisis by trusting in the value of the companies’ assets, and they are wary of getting burned again.
As is often the case with these undervalued companies, as the potential valuation reward increases, the implied risk usually increases as well.
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