3 Declining shares traded below book value. Are they deals or value traps?

Buying a stock at a discount can set investors up for significant gains in the future. And one way to find undervalued stocks is to look at price-to-book ratios. If a stock is trading at or below its book value — its total assets minus its liabilities — that may mean there’s good value for investors. But that’s not always the case.

The assets of a business may be overvalued and therefore the book value may not be so relevant. And investors often discount a stock with a risky business, and deeply discounted stocks can sometimes end up becoming value traps.

Three stocks that are trading below their book value today are Tilray Brands (NASDAQ: TLRY), Walgreens Boots Alliance (NASDAQ: WBA)and Kraft Heinz (NASDAQ: KHC). Here’s a look at how below book value they’re trading and whether they’re truly bargains or just value traps.

Canadian marijuana producer Tilray Brands is currently trading at a price-to-book multiple of about 0.4. That’s a big discount from book value, but not too surprising either. Marijuana companies often experience write-downs because the value of their plants can change, which is why investors may not want to place too much importance on book value when it comes to cannabis companies. That said, Tilray Brands certainly trades at a much more modest valuation than it has in the past. From a high of nearly $17 billion in 2021, its market cap is now around $1.5 billion.

Bargain hunters may see opportunities at this low valuation, but there are plenty of risks. Although the company narrowed its losses in the most recent quarter (which ended May 31), from about $120 million in the year-ago period to just $15.4 million, the business still faces a path uncertain. It’s burning cash and has relied on the liquor business rather than cannabis to generate much of its recent growth.

While there is certainly some hope that Tilray Brands stock could rise if the US legalizes marijuana, there is no certainty that will happen anytime soon. With the question marks surrounding Tilray’s future growth prospects, its lack of profitability and low valuation likely a key reason to buy the stock today, I’d definitely consider this a value trap right now, rather than a bargain purchase.

Drugstore retailer Walgreens Boots Alliance also saw its valuation plummet. The stock hasn’t traded at its current level in decades. It is trading at 0.7 times its book value as investors have significantly shorted this stock.

The story continues

The company noted an investment it made in primary care operator VillageMD earlier this year worth $5.8 billion. Walgreens has focused on launching primary care clinics in its stores in an effort to drive traffic and drive growth, but it’s proven to be a risky strategy so far. The company continues to struggle with profitability and has posted an operating loss in three of the past four quarters.

There’s no doubt that Walgreens is a value trap right now. The business is in questionable shape, and while the stock seems to look cheap, it always seems to find a way to get even cheaper, with many investors seeing no reason to risk on healthcare stock given the uncertainty with facing the business.

Kraft Heinz trades at just under 0.9 times its book value.

The company faces some risk due to inflation and rising costs, which makes its brands seem much more expensive these days, especially compared to private labels. And a big problem for the business is that it has struggled to generate much in the way of growth. Over the past four years, the company’s top line has hovered between $26 billion and $27 billion. While the company’s profits have grown during this time, the lack of revenue growth has made investors bearish on the stock.

Kraft, however, isn’t as risky as the other stocks on this list, and I’m more inclined to say it’s a bargain buy rather than a value trap. Even though its growth rate has been lackluster, the company has many strong brands in its portfolio and has been looking for new ways to drive growth, including launching plant-based macaroni and cheese last year, and is also working on getting it. Lunchables brand in school cafeterias, which they say could be a $25 billion market opportunity.

Kraft’s business isn’t without problems, but it faces challenges as it looks to find levers to pull to spur growth. But overall, it can still be a good buy in the long run.

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David Jagielski has no position in any of the listed stocks. The Motley Fool recommends Kraft Heinz and Tilray Brands. The Motley Fool has a disclosure policy.

3 Declining shares traded below book value. Are they deals or value traps? was originally published by The Motley Fool