The full spectrum of value

Next up… CPL

Looking at my screens this month it felt like I’d developed tunnel vision. All I could see were companies I’d included in the Thrifty 30 portfolio, or companies I’d rejected. There must be more, surely…

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What’s thrifty now?

Mined that seam

Screens throw up opportunities, but mine are becoming clogged with companies that I’ve rejected and companies that I’ve added to the Thrifty 30 portfolio so from this month I’m striking those companies out with a coloured bar: green for additions, red for rejects.

What’s left in my Bargain and Thrifty screens is the white space, filled mostly by two types of business I’m trying to avoid:

1. Financially complex companies in markets that have experienced decades long bull markets but are now experiencing more difficult conditions, like house builders, miners and (obliquely) boutique investment banks. Their performance is, to a great extent, out of their control, because profitability depends on price levels (for property, commodities, the stock market) that could be falling or subdued for a very long time – beyond my five year horizon. That’s what I concluded about shipping too, which I’d put in the same category.
2. Companies like motor retailer Caffyns and Avesco, a supplier of equipment and services for corporate events, that, according to the data, have earned such consistently weak returns in the past it’s difficult to imagine them doing anything different in the future.

In among these a genuine bargain might lie, but I feel as though I’m getting diminishing returns from upper reaches of these lists. I may have picked what I can from them.

Nifty-wise, the list looks more promising. There are miners in the Nifty list too, but also UTV,  Chime, National Express, Jacques Vert and Mears. These companies have been very profitable for a decade and seem comparatively cheap. The question is whether there is a good chance profits in future will be similar or better.

At current prices, it seems the market is betting they won’t be.

I’m cautious about retailers and media companies, but wouldn’t rule out investing in Jacques Vert, radio and TV broadcaster UTV and public relations company Chime, without at least finding out more about them. Operating coaches and trains (National Express), and social care and household maintenance and repair (Mears) seem like suitably prosaic industries.

But I’ve got a soft spot for companies with chequered pasts, and in addition to these Nifty candidates, I think I need to look mare carefully for bargains. I have two options, to look further down the Thrifty list, or invent a different one.

In the now famous words of Peter Cundill, sometimes it’s hard to find bargains, but there’s always something to do…

And this month’s bargains are…

The full range of value

I’m starting the month looking at Bloomsbury and Smith and Nephew, two companies at opposite ends of the value spectrum.

Publisher Bloomsbury appears in my Bargain and Thrifty lists:

The market values Bloomsbury at less than the value of its tangible assets, which, if it has a profitable future, makes it very cheap indeed..

At 2.6 times book value, medical device manufacturer Smith & Nephew is, relatively speaking, the most expensive company in my Nifty table of companies that are generally so profitable they trade above book value (beware of fallen angels though, like Game and T Clarke, which have profitable pasts and rather more uncertain futures):

Smith & Nephew might still be cheap, though, if I can convince myself its high levels of profitability in the past will be sustained in future.

Meanwhile, I have a confession. The push to find new blood for the Thrifty 30 means I’ve been neglecting my obligation to review each company when it publishes its annual report. As the table below shows, the number of unread annual reports littering my desktop is growing.

They will all have to be read, although reviews of IT distributor Northamber (review already started) and Printing.com are most pressing because of their low F_Scores, which indicate that some time ago both companies were already struggling.

Turnarounds and champions

Chipping away at the blind spots

This month’s Thrifty screen has dredged up a bunch of shares dependent on the moribund housing market and Jersey Electricity, which fascinates and frightens me.

[Spreadsheet]

Jersey Electricity is quasi-utility with a monopoly on the electricity supply to the island of Jersey via two submarine cables controlled by the local government. When I last looked at it, the shares cost more than any other in the UK market, but relative to all the property the company owns, it’s among the cheapest.

Because it derives its low valuation from its status as a utility, Jersey Electricity doesn’t fit the profile of a typical Thrifty company, which is a temporarily distressed and may be recovering. Scapa, a company that makes adhesive tape looks more promising. It’s twentieth in the screen, and so not shown here.

[Spreadsheet]

The Nifty screen, which identifies ‘hidden champions’, businesses that can sustain high profitability, is dominated by companies in risky businesses sectors that have grown strongly thanks to the tailwind of globalisation. The market values of oil exploration and production companies, ship brokers and miners depend even more than most on continuing global growth, which is uncertain. What is certain is the destinies of companies in sectors like this are not in their own hands,

I’m simply overawed by the long cycles of boom and bust that drive these companies and paralysed by indecision when deciding whether they are safe investments.

The most likely companies to make it in to the Thrifty 30 from the Nifty screen are in the bottom half of the table. Haynes, Dewhurst and Colefax are already in it. Chime is a former constituent I have mixed feelings about. Video game retailer Game, and construction company T Clarke, make the table by virtue of their very low valuations but probably don’t belong in a list of stable growing companies due to crumbling business fundamentals.

My local Game shop has a poster on its window saying:

It’s not just about the games… We also sell iTunes cards, Club Penguin memberships [and more, see the picture below]

It looks desperate when a company sidelines its core business in its own promotions to flog Angry Birds key rings. Today it’s promoting access to entertainment that can only be delivered online, and that shift to online distribution has undermined Game’s status as a Nifty company.

Choosing from the Nifty list then, three of the bottom five companies look worthy of investigation: Sausage maker Cranswick, fashion house Jacques Vert, and medical device company Smith & Nephew. Despite being bottom of my table, they’re still in the top 10% of all companies that meet the Nifty criteria.

To make the tables more relevant, I could exclude some of the sectors that baffle and repel me, like property, financial services, media, oil and gas, and mining, but I like to see the companies I’m choosing to avoid.

Although I can’t make sense of many of them now, I may be able to one day. And surely that’s the way to become a better investor: Chipping away at the blind spots.

Nice poster, shame about the message…

Gone fishing

Caught some tiddlers, throwing some back…

Last month I included in the Nifty and Thrifty screens companies that reported their latest full year results more than four months before screening. Although the restriction I’d applied before then, including only companies that had reported recently, ensured results were up to date and guaranteed the screens compared companies reporting over similar periods, they were just too restrictive at this time of year, when few companies are reporting.

This month I’ve freed the Bargain Screen as well:

[Spreadsheet]

There are more potential bargains, although it’s important to recognise the financial condition of some of the companies will have deteriorated since they reported, potentially a year or more ago.

Bloomsbury is a net-net (just). Even though rapidly evolving technology is undermining established publishing businesses I’m surprised to see it among the cheapest stocks in the market. Despite the fact Bloomsbury is a profitable company, the Bargain screen ignores its earning power  and instead measures its market price against the value of its most liquid assets, cash, receivables, and inventory.

Airea is a net-net by a more comfortable margin, and next on my hit-list as I decide which carpet manufacturer to add to the Thrifty 30 portfolio. The other option is Victoria, which has a less chequered past.

Leeds, and Mallett, I’ve rejected, and fashion brand French Connection and computer distributor Northamber are already in the portfolio.

There’s a smattering of corporate finance houses in the Bargain screen this month but I’m avoiding them. Finance houses invest their own money as well as advise other companies, and I’m not planning on outsourcing the stock picking role.

So, Airea and Bloomsbury look like the most promising Bargains to investigate this month.