It’s unusual, especially in this market, for a stock to drop below book value. A quick scan of small-cap stocks trading under book value will bring up around 250 such stocks. But, almost all those stocks are either shipping companies, asset managers, REITs, or closed-end funds. Stocks that don’t fit in those four buckets are trading below book value for clear reasons.
The industry may have fallen out of favor, a one off event (or special situation) may have taken place, or the company may be in a struggling niche. Prospects for future growth may be obscured by near term turbulence.
But, it could also be that investors have sold a stock down to a point where it is now a bargain. Book value is one way to measure potential downside risk, if not potential for future growth. If your downside is sufficiently limited, even moderate growth can boost an ailing stock.
JinkoSolar Holding Company, Ltd. (NYSE: JKS) was recently listed by Fortune as the number 1 solar manufacturer in China, and named to the Fortune 500 China list. The stock reached over $30 last year before undergoing a steady stair-step decline in 2018. JinkoSolar recently traded below $15, but its book value is $29.48. That includes $9.75 per share in cash.
Low oil prices, growing competition, and the U.S. tariff dispute with China, have combined to cut the shares of JKS in half. JinkoSolar is attacking the tariff problem by building a plant in the U.S. Importantly, it has already locked up an agreement to supply a major buyer in the U.S., and should profit more from that contract if tariff issues are resolved.
And, in addition to the proactive moves JinkoSolar is making, the company is starting to see some positive signs. Oil prices are now rising (aiding solar stocks), and President Trump recently struck a more conciliatory note with the EU on tariffs. If the tariff standoff with China runs a similar route, then factors may be falling into place for JinkoSolar to rebound. It certainly looks like a value play here for investors willing to endure a few more months of trade war bluster.
Entercom Communications Corp. (NYSE: ETM) hit a stumbling block when it merged with CBS radio late last year. As part of that agreement USTN (US Traffic Network) agreed to pay Entercom $33M. Unfortunately for Entercom, only $3M of the $33 has been paid and a legal battle has ensued after Entercom walked away from an acquisition of USTN.
One of the results of the dispute, and of the earnings shortfall that resulted from missed payments, was Entercom stock dropping from the $11 range to recently trade at close to $7. The book value of this $7 stock, with its many radio properties across the U.S., currently stands at $12.37.
While the USTN dispute drained both financial and management resources from the company, a recent memo from CEO David Field appears to signal a refocusing on Entercom’s business. This could be a rare moment for investors to pick-up an undervalued stock which has been punished due to a one-time event.
When a stock has been going down for several months, and then releases a bad earnings report and goes up, that’s a tell that a possible bottom is in. Speedway Motorsports, Inc. (NYSE: TRK) released earnings last week and had plenty of excuses for missing their number. Weather, rescheduling races, and tickets being given away because events scheduled last year had been cancelled and fans were allowed to attend this year’s event instead.
But the stock of the Nascar track owner did not gap down, and actually has traded up since that earnings release. In the last year, the stock has dropped from $23 to just below $18 now. At these levels it is well below its book value of $22.83 a share.
Revenues have been declining for several years, but the sport is putting in place new formats, heavily promoting the fan experience, and marketing tickets in new and innovative ways. Even in these trying times, Speedway still has operating margins of almost 13% and pays a dividend over 3%. If any of the marketing plays pan out the stock could see a nice bounce off of this bottom.
The book value of a company is a valuable gauge when a stock has been beaten down for any number of reasons. These three small caps, JinkoSolar, Entercom, and Speedway, are being valued well below their book value, and investors should take notice. If even one or two calls go their way they could be off to the races.
Disclaimer: The author and Spotlight Growth has no positions in any of the stocks mentioned in this article. Nor does either party currently have any relationship, or any other conflicts of interest, with any of the companies mentioned in this article. This content is meant for informational and entertainment purposes only and should not be meant as a recommendation to buy or sell any securities. Please visit a licensed financial representative to determine what investments are right for you.
Article By: Steven Adams