3 bargain buys in banking, grains, health

These stocks are undervalued based on their price-to-earnings and price-to-book value ratios.

By TheStockAdvisors Dec 12, 2012 10:46AM

CorbisBy J. Royden Ward, Cabot Benjamin Graham Value Letter

Quality companies with low price-to-book value (P/BV) ratios have outperformed companies with higher valuations for the past three, five and 10-year periods.

The three choices outlined below -- a bank, an agriculture firm and a healthcare provider -- are selling at bargain prices and will likely perform well during the next six to 12 months.

To find the best companies with low P/BV ratios, I used several criteria to make my selections:

  • P/BV ratios less than 2.00
  • Value Line Financial Strength Ratings of B++ or better
  • Low price-to-earnings (P/E) ratios
  • Dividend yields of 1.0% or higher
  • Good earnings prospects for the next 12-month and five-year periods

BB&T Corp. (BBT) provides banking services in the Southeastern U.S, which includes a high concentration of customers in Virginia, North Carolina and Florida. It has 1,800 branches and $178 billion in assets.

BB&T has taken advantage of attractive buying opportunities during the past four years. It acquired Haven Trust Bank and parts of Colonial Bank and will acquire BankAtlantic soon.

Management expects to easily comply with new U.S. government rules and regulations including Dodd-Frank and the Volcker Rule. Consumer protection reform will increase some expenses, but not significantly.

BB&T is taking market share from other banks and is improving the quality of its investment holdings. Underperforming assets fell to the bank's lowest level since 2008.

With a current P/E ratio of just 10.9 and a dividend yield of 3.0%, BBT shares are undervalued. BBT is medium risk. I expect BBT's stock price to reach my minimum sell price of $44.13 within two years.

Bunge (BG) was founded in 1818 in the Netherlands and has grown to become one of the leading agricultural products companies in the world. It obtains soy, canola, flaxand specialty oil seeds from farmers and processes them into protein meal for animal feed.

Bunge is also the leading producer and supplier of fertilizer to farmers in South America, particularly Brazil.

Despite the recent recession, Bunge has been building a major export grain terminal in the state of Washington and two new sugar processing facilities in Russia and Ukraine to meet future demand. The company is also expanding its operations in China and India.

The dividend provides a 1.3% yield, and the current P/E of 12.9 and P/BV ratio of 1.03 are low. I expect BG shares to increase to my minimum sell price of $103.41 within one to two years. BG shares are medium risk.

UnitedHealth Group (UNH) is a leader in health care management. It is gaining market share by lowering costs and increasing services to customers.

In July, the U.S. Defense Department awarded its Tri-Care contract to United Health. The five-year contract will provide a noticeable boost to the company's sales and earnings.

The rising Medicare population and the increasing transition of Medicaid beneficiaries into managed care should boost revenue growth during the next several years.

At 10.3 times current earnings per share, UNH shares are undervalued. The 1.6% dividend yield and very low risk rating make UNH an excellent investment choice.

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