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Use These 5 "Below Book Value" Stocks To Play Defense

 July 22, 2011 03:52 PM

What will the U.S. economy look like in 12 months? The crystal ball, as they say, is hazy.

The odds seem balanced between a renewed recession and a long-awaited upturn. With such uncertainty, it's wise to focus on stocks with material protection on the downside. This way, if the economy and the market hit the skids, investors will be less likely to unload these stocks and will instead start to sell pricier equities.

You can find this downside protection on the balance sheet. Many companies have shares selling for less than the value of the assets on their balance sheet, or below tangible book value. These "below book" stocks tend to be safe harbors in any market storm.

Know your assets
To profit from this approach, you'll need to figure out whether the balance sheet figures represent real-world values. When I ran a screen of below-book names, a number of dry bulk shipping firms appeared right at the top. Yet as I noted last month, it's not clear what their ships would actually fetch in the re-sale market. So for today's purposes, I've eliminated all of those names from the screened results. I also noted a preponderance of big banks on the list. Many are limping along in a tough economy, waiting for business to pick up. Yet when that happens, shares could move up to 1.5 times book value, more than 50% above current levels, if history is any guide.

After excluding shippers, insurers and banks, what's left? Well, Audiovox (Nasdaq: VOXX), which I wrote about earlier this week, stands out as a deep value play.

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