When the economy is growing, you need to focus on income statements, looking for signs that sales and profits can grow at a heady clip. In tougher economic times, investors pivot over to the balance sheet, looking for areas of support to gauge how much further a stock might fall. And there’s no truer gauge of a company’s balance sheet strength than its tangible book value (also known as “shareholder’s equity,” minus any goodwill).

In theory, a stock should never be worth less than a company’s stated book value. In reality, investors often sell a stock without noticing the balance sheet, and the tangible book value can become much more valuable than the company’s stock price. Back in 2002, dozens of solid companies suffered just such an ignominious fate. Yet by 2004 many of these “below book” stocks rebounded sharply.

It’s happening again. The recent market rout has created a veritable bonanza of “below book” names. I’ve weeded out all financial services stocks, and still managed to come up with nearly two dozen stocks that now trade well below tangible book value.

Importantly, there’s little reason to think that book value will shrink in these challenging economic times. Every stock on this list was profitable last year and is expected to be profitable in 2011 as well. Those profits should boost book value even further.

 
Of course you’ll need to get a sense of what assets are on the balance sheet to truly verify that the board of directors could gain top dollar for the assets if the company was to be liquidated (which is the real base scenario for “below book” names). As an example, you should question the value of oil refiners such Valero Energy (NYSE: VLO) and Marathon Oil (NYSE: MRO). The energy sector is awash in too much oil refining capacity, so if these companies looked to sell their refineries, they’d likely get a lot less for them than what they paid to build them — which is the value carried on the balance sheet.

In a similar vein, you might want to cross Great Plains Renewable Energy (Nasdaq: GPRE) and Sunpower (Nasdaq: SPWRA) off of your list. These companies have poured millions of dollars into facilities that can produce ethanol, and solar panels, respectively. Demand for each of these products is now weaker than many previously forecasted, rendering their manufacturing facilities less valuable in the eyes of potential purchasers.

Yet other companies have verifiably attractive assets. Much of JetBlue’s (Nasdaq: JBLU) airline fleet is quite young and very fuel efficient. If the carrier was put up for sale, rival airlines could afford to pay a nice premium to the current share price and get an attractive fleet. As an added bonus, JetBlue holds the rights to many attractive gates at major East Coast airports, and yet it doesn’t even list their value on the balance sheet. Although Delta (NYSE: DAL) remains as my favorite current airline stock, Jetblue’s below book valuation is awfully tempting.

Two more stocks to buy
It’s unusual to find a large blue chip on this list, but with $55 billion in annual sales, Bunge (NYSE: BG) surely qualifies. This company is involved in a wide range of agricultural businesses, from fertilizer sales to oilseed processing to wholesale sales of cooking oil. Business is solid right now — the company has topped quarterly profit estimates by an average of 25% in the past four quarters, and (earnings per share) EPS is likely to be a record $6.50 this year. Shares are getting little affection, though, recently falling in tandem with the broader market. In fact, at a recent $59, the stock is 17% below tangible book value and an even broader discount to Merrill Lynch’s $79 target price. They figure shares are worth 10.5 times their 2012 EPS forecast of $7.50.

Another favorite book value play of mine right now remains Micron Technology (Nasdaq: MU). About a month ago, I told you of Micron’s strong position in the areas of memory and storage for the next generation of tablet computers and smart phones.

That transition is still underway, and quarterly results (and the stock price) are currently being constrained by tepid results in the company’s legacy DRAM business. In its fiscal fourth quarter (ended August), Micron lost $0.14 a share, below analysts’ forecasts, due to recent weakness in DRAM pricing. That net loss obscures the fact Micron still generated $354 million in operating cash flow in the quarter.

More importantly, tangible book value stands at a very healthy $8.15 billion, 42% higher than the company’s current market value. In response to the lagging valuation, Micron is using its $2.2 billion cash balance to buy back stock. I still think shares of Micron are headed beyond the stated book value and toward $12. At that price, shares would trade for five times projected 2012 free cash flow of $1.5 billion, on an enterprise value basis.

Risks to Consider: Below-book stocks lack catalysts, except that they’re cheap. If any of these companies failed to maintain profitability, then accumulating losses would erode book value.

Action to Take–> The charm of these below-book names is their clear underlying asset support. This makes them defensive in the current environment, while sporting meaningful upside when the market rebounds. My personal favorites mentioned above are a good place to start, but you might also find a gem in the list above during your own research.