Holding companies, which are also known as conglomerates, own equity stakes in various businesses. Theoretically, the combined valuation of all its businesses should equal its total market value.
But market history has shown that conglomerate stocks have always underperformed the stock market because of the perception of lower expected returns brought about by diversification.
Based on historical data, the market value of a holding company is positively influenced by its return on equity (ROE) 73.9 percent of the time.
This means that when the ROE of a holding company falls, there is a strong probability that its stock price will also fall, and vice versa.
Since 2018, the average ROE of conglomerate stocks has fallen from 9.4 percent to 7.6 percent today, resulting in a deterioration in their share prices.
The fall in market values has caused the average earnings multiple of conglomerate stocks to trade at only 4.86 times today, which is roughly half the average Price-to-Earnings (PE) ratio of the PSE Index.
Lower returns also caused the share prices of conglomerate stocks to fall below their net worth. The average holding company today is trading at a huge bargain of 51 percent discount to their book value.
But amidst the decline in the conglomerate sector, there is always opportunity to find stocks that offer good value.
One of these stocks is Cosco Capital, Inc (PSE: COSCO), which may have been priced too low by the market compared to other conglomerate stocks despite its promising fundamentals.
COSCO offers a compelling value investing opportunity as its current share price does not correspond to its long-term fundamentals.
As a value investor, no matter how low the stock has fallen, it is always wise to look at the fundamentals of the stock. When you understand the intrinsic value of the company, you will have more confidence in investing in the stock.
Here are the five reasons why COSCO may be the most undervalued holding company today and how we can profit from it…Click here to read more
