With stock prices down about one third in the past year, the search for good investment value has become a search for meaning. Although valuation yardsticks and growth assumptions that were firmly held a few months ago have been trashed, clients want to know whether a stock is now cheaply valued or still overvalued by market reckonings.

There are no easy forecasts of growth or profitability. Stocks have returned to an era in which financial strength is paramount. That directs investment analysis to the balance sheet and the methods used by pioneering analysts.

There is one basic gauge of value: the often disdained notion that a firm’s balance sheet can provide a basis for measurement. The specific base measurement is net worth, or net asset value — commonly known these days as shareholders’ equity.

This reverts to the pioneering work of the late Benjamin Graham, who discerned so much of basic security analysis in the fallen markets of the 1930s. In his book, The Intelligent Investor, Graham wrote that a stock may be worth buying if it trades at no more than 30%-50% above book value.

You need to keep in mind that Graham excluded intangibles listed on a firm’s balance sheet when calculating value. So, in comparing stock prices with balance-sheet value, you need to work with the “tangible book value.”

For most companies, there is a significant difference between “book value” and “tangible book value.” All those acquisitions made during recent boom years loaded balance sheets with “goodwill” — not to mention the increasing appearance of “intangibles.” The argument is they add nothing to the intrinsic value of a stock, especially when business is contracting.

To accountants, goodwill and intangibles are items equally important as other lines on a balance sheet. Modern investment analysts, as did Graham, take a different view and treat these items on a company-by-company basis; in some cases, goodwill really may be worth what it says.

The accompanying table shows a cross-section of the Canadian market, illustrated by 30 firms. Per-share figures are from the latest fiscal yearend reports, mostly for 2007. Valuations have dropped sharply in the past year, as shown by the contrasting price/book value ratios.

Note the frequent differences between “book value” and “tangible book value” — and the extent of these differences. Even a company as dominant as Power Financial Corp. carries a huge load of intangibles, more than the value of its “hard” assets.

To take an extreme example, Shoppers Drug Mart Corp. is worth $14.29 a share based on its last annual report. But when intangibles are deducted, its value drops to $3.66 a share. If Shoppers were to get into difficulty or be sold — not something that’s expected — it is unlikely that a prospective buyer would pay for all that goodwill.

So, Shoppers appears to be an expensive stock, trading at 12 times its 2007 yearend tangible book value. Even when intangibles are included, at 3.1 times book value, this is well above a price that would be acceptable under Graham’s reasoning.

The result is that very few stocks look cheap at recent price levels. Magna International Inc., in the devastated auto industry, stands out: it is trading at less than half its tangible book value; Sherritt International Corp., in the stricken industrial metals business, trades even lower.

Then, there are companies in the table without tangible book value. In theory, they are worthless. Any valuation, however, will start with book value and discount the value of intangibles to a level that’s deemed appropriate. That’s one way of dealing with a goodwill-loaded situation such as Power Financial.

The era of stocks trading at 10 or more times book value seems to be disappearing. Among the companies listed in the table, Potash Corp. and Research In Motion Ltd. traded at about 13 times and 21 times tangible book value, respectively, a year ago. Now, only Shoppers and WaterFurnace Renewable Energy Inc. (formerly WFI Industries Ltd.) remain in that camp. IE