5 Stocks Growing Book Value but Getting Cheaper

Oil, financials and telecom topped the list

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Oct 09, 2015
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Sometimes companies can exhibit a prowess for building book value, but for any number of reasons the market could either not recognize it or discount the company due to a temporary, negative situation.

Recognizing these types of companies is central to the investing process for Martin Whitman (Trades, Portfolio) and Third Avenue Management (Trades, Portfolio), as well as many value investors.

“Indeed, assessing the ability of a company to continue to grow book value at double digit rates is one of the main endeavors of our due diligence process,” Whitman said in his third quarter letter to shareholders.

“Most of the largest holdings in our Fund have been active year to date, with management teams engaging in strategic actions to boost book value per share. Several of the holdings that came under price pressure in the quarter continued to improve their ability to compound book value growth. These good companies got cheaper.”

Many such companies traded on the market this week. The All-In-One screener is a powerful way to uncover them.

Filtering for companies with large market capitalization, whose prices declined 40-50% in the past 12 months and who were among the top 10 for five-year book value growth, the screen yielded: Bank Bradesco SA (BBD, Financial), Galaxy Entertainment Group Ltd. (OTCPK:GXYEF, Financial), Apache Corp. (APA, Financial), National Oilwell Varco Inc. (NOV, Financial) and Telefonica Brasil (VIV, Financial).

Companies need both a history and a potential future of book value growth, Third Avenue also said. Additional research into how each company’s management is allocating capital to continue to increase value will be needed.

Banco Bradesco (BBD, Financial)

Banco Bradesco’s stock fell 47% in the past 52 weeks to around $6.27 Friday, and the company has a five-year book value growth rate of 12%.

Banco Bradesco is a Brazilian commercial bank founded in 1943 with a $31.7 billion market cap. The company reported second quarter 2015 net income of R$4.5 billion, or R$3.35 per share, a 20.6% year-over-year increase. Second-quarter revenue also increased to $17.1 billion, from $11.8 billion the same quarter a year earlier. Banco Bradesco had $1 trillion in assets as of June, a 10.6% increase from the previous year.

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Of gurus who held Banco Bradesco in the second quarter, Caxton Associates (Trades, Portfolio) started a position; Louis Moore Bacon (Trades, Portfolio) increased his position; and Howard Marks (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) all reduced their positions.

Galaxy Entertainment Group Ltd. (OTCPK:GXYEF, Financial)

Galaxy shares fell 45% in the past year to $3.32 Friday, and its book value grew at a five-year rate of 38%.

The company operates resorts and casinos in Macau, and deals in construction materials in Hong Kong, Macau and Mainland China. In the first half of 2015, Galaxy reported a 34% year-over-year decline in revenue to $25.4 billion, and a 66% year-over-year decline in net income to $2.0 billion. The company said it faced cautious consumer spending and higher staff costs, and was depending on increasing domestic consumption, a growing affluent middle class in China and major infrastructure improvements to drive fundamental long-term growth.

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No gurus tracked by GuruFocus own this stock.

Apache Corp. (APA, Financial)

Apache Corp. shares have lost 44% in a year, closing at $46.62 Friday. In the past five years, the company grew book value at a rate of 9%.

Apache is an oil exploration and production company with production activity in six countries that has a $17.6 billion market cap.

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In the second quarter, it reported a net loss of $5.6 billion, or $14.83 per diluted share, compared to net income of $911 million in the same quarter last year. Revenue was $1.98 billion, versus $3.3 billion a year ago as the price of oil remained low.

In the second quarter, T. Boone Pickens started a new position in Apache, while five gurus sold out their positions. Dodge & Cox is the largest guru shareholder, with 30,013,813 shares, or 7.9% of the company.

Marty Whitman and Third Avenue Management both own this stock as well.

National Oilwell Varco Inc. (NOV, Financial)

National Oilwell Varco shares slid 42.4% in the last year, closing at $40.79 per share on Friday. The company also grew book value at a rate of 9% over the past five years.

National Oilwell Varco designs, manufactures and sells equipment used in the oil and gas industry in six continents and has a market cap of $15.7 billion.

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The company announced second quarter net income of $289 million, or $0.74 per diluted share, versus $619 million, or $1.44 per diluted share, in the second quarter a year ago. Revenue was $3.19 billion, a 26% decrease from the second quarter a year ago. The company attributed the declines to a “cyclical downturn” in its earnings statement.

Three gurus started new positions in National Oilwell Varco during the second quarter: Bruce Berkowitz (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Manning & Napier Advisors. Six others, including Warren Buffett (Trades, Portfolio), exited, while numerous others adjusted their positions in the company.

Telefonica Brasil (VIV, Financial)

Telefonica Brasil shares dropped almost 42% in the past year, closing at a price of $10.45 Friday. The company also grew book value at a rate of 12% over the past five years.

Telefonica Brasil is the largest telecommunications company in the country, with a presence in 21 countries and a $17.65 billion market cap. The company reported R$932.9 million in net income for the second quarter, a 56.4% year-over-year drop, and net operating revenues of R$10.4 billion, a 5.4% year-over-year increase.

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No gurus sold or reduced their position in Telefonica Brasil, but four started a new position in the company: Jim Simons (Trades, Portfolio), Caxton Associates (Trades, Portfolio), Howard Marks (Trades, Portfolio) and Daniel Loeb (Trades, Portfolio). Three also bought more shares of the company: Jeremy Grantham (Trades, Portfolio), Charles Brandes (Trades, Portfolio) and Richard Pzena (Trades, Portfolio).

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