#-ad_banner-#This past Wednesday (June 1), the Dow Jones Industrial Average (DJIA) dropped nearly 300 points in just one day, causing investors to feel a bit shaken. Tempting as it may be to load up on names that now seem like bargains, further market drops may still occur in the next few weeks and months. This is why it pays to focus on stocks that have clear downside support. And as Benjamin Graham and David Dodd once noted in their famous tome Security Analysis, the safest stocks are those that trade for less than their tangible book value.

Naturally, investors need to understand what’s on the balance sheet to see whether the assets are truly appealing. For example, dry-bulk shipping stocks look awfully inexpensive by this measure, but as I recently noted in this piece, the value of the ships these companies own may be worth a lot less than the value carried on their balance sheet, leaving only one stock among the group looking truly appealing.

With this in mind, here are four stocks that trade well below tangible book value, while holding assets that are appropriately valued on the balance sheet.

 

1. Delta Petroleum (Nasdaq: DPTR)
Delta Pete drills for oil and gas, and has several key oil fields that are starting to see rising output. Recent tests on yet-to-be-tapped wells are also showing a lot of promise. But the company has been dogged by concerns that it carries too much debt, so it will need to boost cash levels to fully realize its development program. This is precisely what appears to be happening. On a recent conference call, management noted several options — including asset sales — could be pursued in order to relieve those debt concerns. If and when that happens, value investors are likely to notice the wide gap between market value (about $200 million) and tangible book value (about $500 million).

2. Republic Airways (Nasdaq: RJET)
A heavy debt load is also weighing on this company, the operator of Frontier Airlines, which has seen its stock fall by half since last November as rising jet fuel prices turn anticipated profits into losses. Yet these debt concerns may be overblown. After all, the company is reporting losses on a generally accepted accounting principles (GAAP) basis, but is still throwing off positive cash flow. The carrier, which also operates a regional feeder subsidiary for Delta Airlines (NYSE: DAL), is heading into its seasonally strong third quarter at the end of this month, at which time profits are expected to rebound nicely.

To be sure, the oil price spike really hurts the company’s bottom line. Analysts at Goldman Sachs think oil prices will boost Republic’s expenses by more than $200 million this year. Yet they note rising airfares are offsetting a good chunk of that expense hike. The analysts see earnings per share (EPS) rebounding back up to $0.85 in 2012, assuming oil prices stay flat and management is able to rein in other costs.

Goldman’s $6.50 price target is roughly 40% above current levels. The book-value support is in place as well: $3 billion worth of planes are above the $2.2 billion in debt the carrier has on the books, while shares trade for just half of tangible book value.

3. Conn’s Inc. (Nasdaq: CONN)
This is a clear case of investors selling a stock too far below an appropriate level. This Texas-based electronics retailer is surely feeling the same pressure as larger peers such as Best Buy (NYSE: BBY) and hhgregg (NYSE: HGG), as seen by slumping sales and profits. Like both of these firms, Conn’s remains profitable (albeit less so than before) and needs to wait for a rebound in consumer spending. Yet the balance sheet should surely attract value investors. The retailer is due $319 million from recent sales to customers, carries $85 million in inventory and sports tangible book value of $363 million — yet investors value the whole company for less than $200 million. If this gap persists for much longer, then Conn’s may become a target for private-equity investors who could pay a substantial premium to the current share price and still pick up assets for as little as $0.80 on the dollar.

4. Hornbeck Offshore Services (NYSE: HOS)
The drilling slowdown in the Gulf of Mexico has surely hurt this owner of drilling rigs. Clients have been able to secure much lower lease rates due to a glut of rigs sitting idle. This is why the $1.33-a-share profit in 2010 is likely to be replaced by a large loss this year. Investors have cooled to Hornbeck, whose shares trade for just half the levels seen three years ago when drilling activity was robust and just 80% of the value of the company’s intangible assets.

Recent trends are improving. The glut of unused drilling rigs is being put back into service. A shift back toward normal supply/demand dynamics is likely to yield improving lease rates for Hornbeck, which looks positioned to generate around $240 million in earnings before interest, taxes, depreciation and amortization (EBITDA) by 2012. The company’s market value is just three times that figure. As Hornbeck’s quarterly results steadily improve, look for investors to take note of the stunningly cheap balance sheet and EBITDA ratios, perhaps pushing shares up 30% to 40% from current levels.

Action to Take –> Not only do these stocks look undervalued, they are so cheap that they are unlikely to fall very far even if the market encounters further weakness. This spells lower risk and ample reward, the two things value investors like most.

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