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Core of the Story

The notion that stocks that trade at less than book value are undervalued has been around for decades. It has been used as a value screen by investors and portfolio managers. Services that track mutual funds (Morningstar, Value Line and Lipper) have used it as their basis for categorizing funds into value and growth funds—value funds invest in stocks with low price-to-book value (PBV) ratios and growth funds in stocks with high price-to-book-value ratios. As with PE ratios, rules of thumb abound—stocks that trade at less than book value are undervalued, whereas stocks that trade at more than twice book value are overvalued.

Why does this story carry so much weight with investors? There are several reasons; two are considered below:


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