I am a firm believer in mutual funds and the power of diversification, but every now and then I find it useful to question my assumptions. I wrote recently about “creating your own personal mutual fund,” questioning whether the decline in trading costs might motivate more investors to trade in large numbers of individual stocks, instead of mutual funds.
If I was to buy an individual stock, what would I buy? There is a lot of chatter these days, that there is no more alpha in the market — that stock prices reflect the true value of the stock — that there aren’t any hidden nuggets out there. While I’m not entirely sure I buy that premise, I do believe that the smaller the company, the fewer eyes are watching it.
Market Cap: Companies with less than about $1.5B in market capitalization tend to have zero to four analysts tracking them. Companies that are too small can have liquidity issues and are more volatile. So I chose companies with a market capitalization between $0.5 – $1.5B.
Steady Growth: I wanted to see some steady revenue growth, >3% for the last three years.
Price/Book: Normally, I would search on Price/Earnings, but the recent market turmoil, I thought Price/Book would be a better metric, so I searched for P/B < 3.
I entered the search in Morningstar and found about 150 stocks that met the criteria. What surprised me was the number of stocks that are trading for less than book value. Here is the list of stocks with P/B <1.
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