Stocks Bought Below Book Value Won’t Cause Lost Sleep They Won’t Fall Far In Bear Market, May Be Takeover Bait

Worried that the six-year bull run carried stock prices too high? Maybe you should relax and adopt an investment approach that one of its practitioners calls “pretty sleepy.”

It’s buying shares priced low in relation to their book value, or net worth or liquidation value, if you prefer. Disciples say the strategy will let investors profit if prices keep rising - but offers the prospect of owning stocks that will fall less than the rest if the market tanks. Meantime, these “cheap” stocks often are takeover targets.

William Lippman, who heads the $630 million Franklin Balance Sheet Fund, buys only shares that sell for less than their book value.

“What we’re trying to do is buy a dollar’s worth of assets for 80 cents,” Lippman said.

With that kind of discount, he said, chances are it won’t fall much farther if the whole market drops.

Since the end of 1993, Lippman’s Balance Sheet Fund gained 42.1 percent, lagging the 52.5 percent advance in the benchmark Standard & Poor’s 500 Index. The fund recently had the lowest price-to-book-value ratio of 2,056 diversified mutual fund tracked by Morningstar Inc.

Nick Whitridge, who manages $545 million at Babson Value Fund and Babson Shadow Fund, has the same philosophy.

He limits his stocks to those that sell for less in relation to net worth than the average share in the Standard & Poor’s 500 Index. Currently, that average share trades at 3.7 times book value.

Whitridge is the one who calls this strategy sleepy, but he also says, “It’s very low risk.”

Lippman says he doesn’t care if a stock he buys continues to trade at a discount to book value - so long as the company keeps increasing its net worth by boosting earnings.

American National Insurance Co. “is that kind of company,” Lippman said. “It’s probably sold below book for as long as you can look back, and it may well sell below book forever, but we make a lot of money on it.”

Texas-based American National, which also pays a dividend currently equal to a 3.9 percent annual yield, closed yesterday at $65.50, a 16 percent discount to its book value of $78.26.

Franklin’s average cost for the stock is about $52 a share.

Other Lippman holdings include: Total Petroleum (North America) Ltd., USLife Corp., Crown Central Petroleum, Home Beneficial Corp., Aztar Corp., Affiliated Community Bancorp and Little Switzerland Inc.

The Balance Sheet Fund will usually sell a stock once it rises to 20 percent over book value, Lippman said.