Eeny, meeny, miny, moe

In practice:

Catch a share near its low

Starting off where I finished last week, clicking through the companies I’ve profiled over the last year to determine which are suitable for the Thrifty 30 portfolio, I’m rejecting Business Post (BPG) again.

Although most of my junk mail and a lot of actually quite useful mail seems to be franked ‘UK Mail’, the name of its growing postal division soon to be adopted by the whole company, I can’t get excited when the shares cost fourteen times earnings averaged over ten years.

Up to now, pundits seem mostly concerned about how its parcels division will fare in the recession but recessions are temporary (although some take longer to recover from than others). It’s UK Mail that worries me, because the competition there isn’t just from other operators, but the Internet.

While the relaxation of Royal Mail’s monopoly has created an opportunity that Business Post has exploited, the bigger picture is surely one where more and more of us request online statements and succumb to Internet marketing.

I don’t like rejecting a company that otherwise fits the bill (i.e. it’s financially strong) because of speculation about how the future might turn-out, but it looks to me like technology could permanently render Business Post less profitable.

That would mean lower returns, and therefore we should pay less for our share.

If Business Post is a headache, Chime Communications (CHW)is a full-on migraine, mainly because its shares are up 65% since I wrote about it in June. While that’s a green light to a momentum trader it’s a definite amber one for a value investor, especially as the shares had already trebled.

The company shouted (literally, in an Internet sense – using capital letters) its achievements in it’s interim results:

HIGHEST FIRST HALF PRETAX PROFIT IN THE HISTORY OF THE COMPANY

and

OPERATING PROFIT UP 3% TO £9.4 MILLION (H1 2008: £9.1 MILLION)
- 100% organic

It may sound like a market grocer, but it’s impressive for a PR and marketing agency in a recession.

Chime seems to have convinced investors and customers that it can manage reputations better than its competitors and so it stands to gain (or is gaining) from the increasing pervasiveness of the Internet, where reputations can, and frequently are, built up and trashed in quick succession.

I have no more confidence in that version of the future than I do in the version that sees Business Post’s business in slow decline, but there’s one big difference, and it’s entirely about the present.

Although its shares have risen from 37p in January to over 190p, Chime’s shares still only cost nine times 10 year earnings.

While it goes against the grain to buy shares that have risen so far, there is a difference between value investing and being downright contrarian. Value investing means buying shares when you see value even if, as occasionally happens, others do too.

So I’m including Chime at yesterday’s close in the Thrifty 30, which is, a portfolio of good companies at cheap prices. If you would like to know more, please read last week’s blog or watch me tell He-Who-Must-Be answered, Interactive Investor’s editor-in-chief, about it on iBall TV.

I’d recommend the former!

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Here’s a list of cheap but financially strong companies, judging by the numbers:

NB: Scroll to the bottom of the spreadsheet for explanations of the column headings. The data used to compile the table is from two databases available to private shareholders, Sharelockholmes.com, and Sharescope.

After Monday’s experience with Total Systems and its shocking spread, I’ve included Normal Market Size in the table, and favoured more liquid companies in the ranking formula that puts the most attractive shares at the top and the least attractive at the bottom.

Investors who want more shares than the NMS allows may have to pay more for them than the quotes provided by market makers indicate, and since really illiquid companies with NMS’ below, say £1,000, or £500, are likely to have wide spreads as well, they’re expensive to trade and less desirable than shares which are more freely traded.

The last column in the spreadsheet (you may have to scroll to the right to see it) contains the date of the most recent full year results for each company. This too is an important statistic because most of the data used to calculate the various ratios and measures comes for the results.

The older the data is, the less reliable it is as a guide to a company’s current position.

Of course, the numbers don’t tell the whole story, they may be inaccurate, and they don’t tell us why the shares are so cheap. That’s why I take a closer look at one company every week.

In theory:

Minsky’s enduring moment

Hyman Minsky’s Financial Instability Theory explains the financial  crisis and subsequent recession better than any other, yet mainstream economists ignored him, says Steve Mihm

“To get a better glimpse of the future,” Robert Shiller, “looked further in the past”, according to this thorough profile of the economist.

Wall Street is embracing Twitter, but doesn’t really know what to do with it because 80% of tweets are nonsense.