Book value has long been a beloved method for valuation used by any number of value investors from Benjamin Graham to Walter Schloss to Warren Buffett. At its core, book value is a way of measuring the value of a company in its simplest terms. Stripping away liabilities and intangible assets, the book value of a company is what shareholders should receive should the company completely liquidate all of its assets. Its value lies in the ability to gauge the price of a security when taken against the assets it holds.
Book value clearly isn’t a silver bullet. Because it focuses on quantifiable assets, some types of companies (like a software developer for instance) may have almost no book value despite being a strong company because of innovative thinking or services provided. However, that doesn’t mean that P/B ratios (the market value of a company’s stock divided by the book value) aren’t a valuable tool in determining which companies are worth what they cost on the open market. A low P/B means that the company’s underlying assets are large when compared to its price. A high P/B, though, means that buying shares involves paying a serious premium on the company’s tangible assets.
So, which companies don’t appear to be a great value? The following five companies all have P/B values over 5, meaning an investor would need to pay $5 for every $1 of assets that company has on the books. What’s more, each of these companies also has a short float (the portion of shares owned by people speculating that the stock will fall) that exceeds 20 percent, meaning a relatively large portion of investors expects the company’s share price to fall. While book value isn’t entirely reliable, the combination of high P/B ratio and a large short float could be a sign that these companies have trouble on the horizon.
P/B: 15.99 Float Short: 44.69 percent
Tesla Motors is a car company specializing in making luxury electric automobiles. Tesla is a young company, and it’s not ridiculous to think that the company might be able to find a niche market that will power it to profit. However, it’s clear that a lot of investors appear to be betting against that happening.
Aruba Networks (ARUN)
P/B: 5.91 Short Float: 20.84 percent
Aruba makes networking and communication devices to aid users connecting to corporate information technology. While Aruba has strong earnings projections for the future and a low debt load, the P/B points to a company that’s trading at a price higher than its underlying value.
United Rentals (URI)
P/B: 25.25 Short Float: 29.08 percent
United Rentals is a rental company that offers a variety of different kinds of equipment rentals to the construction industry, municipalities, and homeowners. Much of United Rentals issues may come from the relatively high levels of debt it’s carrying (debt/equity ratio, which measures the amount of debt a company is carrying against the value of its stock, is almost 30), so its P/B could improve significantly over time if it can pay down said debt.
The Fresh Market (TFM)
P/B: 19.31 Short Float: 20.28 percent
The Fresh Market is a specialty grocery company with 95 stores in 19 states in the Southeast, Midwest and Mid-Atlantic regions. The store’s shares, though, appear to be overvalued and some investors might be banking on that.
P/B: 9.69 Short Float: 20.65 percent
There really isn’t anything more to be said about Netflix’s issues that isn’t already well-worn territory, but suffices to say that it may not be a big surprise to see it on this list. What may be surprising is that Netflix’s P/B is still as high as it is despite losing well over half its share value since last summer.