Building a sizable retirement nest egg requires a great deal of flexibility.

When the economy is expanding, you need to dig deep for the best growth stocks. These are the names that can see their price-to-earnings (P/E) multiples expand to very lofty heights as investors extrapolate robust growth rates for several years. But this hasn’t been the case in 2011. The economy has muddled along at a tepid growth rate, and may not build a head of steam until later in 2012 or perhaps in 2013. While this lasts,  your investment focus needs to retain a defensive posture as capital preservation becomes just as important as capital appreciation.

That’s why, throughout the year, I’ve been focusing on companies that sport very strong balance sheets. Any time you can find a company with a market value that is well lower than the net assets sported on the balance sheet, you can sleep better at night.

I put together a list of stocks trading for less than 80% of tangible book value. Each is expected to post full-year profits in 2011 and 2012, so book value is likely to rise even higher from here. Let’s take a look…

Rebuilding a tattered reputation
Whenever you see a stock trading at just 39% of tangible book value, it certainly catches your eye, but you know there has to be a catch. And when it comes to TravelCenters of America (NYSE: TA), which operates more than 200 truck stops across North America, there are a pair of them.

First, the company was saddled with very expensive leases from its landlord, Hospitality Properties Trust (NYSE: HPT), which owns the underlying real estate and facilities at each truck stop. This explains why the company lost a collective $300 million from 2007 to 2010.

Second, management, aided by a too-friendly board of directors, has been lavished with too much compensation, according to some on Wall Street. It’s unclear what steps the company is taking to improve its corporate governance (and hence its reputation on Wall Street), but the income statement is now markedly healthier, since TravelCenters was able to renegotiate much better lease terms from HPT. Citigroup estimates the company would have lost $5 million in 2010 if these lease terms had been in effect last year, instead of the $65 million actual loss.

Better still, the lower lease costs, coupled with an uptick in traffic, are putting TravelCenters on a path to finally make money in 2011. Analysts anticipate earnings per share (EPS) hitting $0.67 this year, and look for a 20% jump in 2012 to $0.81, simply based on recent operating trends. Per-share profits could get a boost in 2013 as well, because the company is in pursuit of existing truck stops to acquire. According to management, every new site that is purchased adds roughly $0.02 to EPS. These gains largely come from increased usage of the company’s Fuel Card, earning the company roughly $4 in extra profit for each gas tank that gets filled up, as funds don’t need to be remitted to the major credit card processors. 

Citigroup’s Susan Anderson says shares are worth around six times projected 2012 EBITDA, or $8. That’s nearly 100% upside from current levels. And this target price is still below the $11 per share in tangible book value. It may take a few quarters for this trade to work, though. TravelCenters may still lose money in the December and March quarters, and the stock may only really respond when an expected bulge in profits arrives in the June quarter.

Ready for rough seas
It’s no secret European consumers may not be spending much money on leisure in 2012. Luckily for Royal Caribbean Cruises (NYSE: RCL), the region represents less than 10% of revenue (compared with 45% for rival Carnival Cruise Lines (NYSE: CCL)). Still, this has been cold comfort to Royal Caribbean investors, who have seen the stock fall nearly 50% this year, compared with a 30% loss for Carnival.

Investors are right in shunning all cruise line stocks. The industry has been so focused on market share that profits have taken a back seat. Adding a lot more new ships to the mix each year has led to price wars and weak profit margins. But that’s about to change, according to Goldman Sachs. Their analysts are “increasingly optimistic that cruise operators are shifting their focus to enhancing existing hardware and improving ‘same ship’ profits, and away from building new ships.” To boost the profitability of each voyage, Carnival and Royal are adding a wide range of new amenities that are already boosting the amount of money passengers spend onboard. “This shift to ‘same store’ from ‘more stores’ could be a structural change and could reverse the decade-long decline in ROIC (return on invested capital),” according to Goldman. 

It may take some time for the industry discipline to pay off. Analysts expect EPS for Royal to rise roughly 13% in 2012 to about $3.10, but it may be wiser to assume profits stay stuck around $2.75 for a while (as will likely be the case in 2011) in case the global economy remains challenged. At this price, however, the stock is still inexpensive at less than 10 times projected profits.

More to the point, the cruise line operator’s fleet of ships is now being undervalued, as the company is trading at just $0.70 on the dollar in terms of tangible book value. If recent improving employment trends can be sustained and Royal Caribbean is able to meet the current 2012 EPS forecasts, then that P/E multiple may expand up to the 12-13 range, implying a stock price move up from the mid $20s into the low to mid-$30s (which would still be below the stock’s book value per share).

Risks to Consider:  These below-book stocks typically lack near-term catalysts and are unlikely to move higher until the broader market does. Given the current global economy, it may take a few quarters before any upward price movement happens.

Action to Take –> The approach you need to take to these stocks is my preferred method of investing — especially in this market. The key here is the opportunity to capture decent upside in these names — likely in tandem with the broader market — while having more clearly-defined downside protection, since they already trade below book value.

TravelCenters and Royal Caribbean are out of favor at the moment, but are taking steps to improve their long-term profitability. These are my two favorite picks from the results of my screen. But you may want to look into other names in the list to see if you find a different opportunity to profit as well.