The not-so Thrifty

In practice:

Not like the good old days

Sadly my plan to create a model portfolio of good companies at cheap prices, the Thrifty 30, by going back through the companies I’d profiled in the last year-or-so and including those that still fit the template, is snagged on the rusty nail of exuberance.

Since investors have enjoyed a summer a love, most of the companies have risen in price. I wish I’d created the Thrifty 30 back in March. There’d have been more companies to put in the portfolio, and it would have benefitted from all that lovin’.

Having risen from a low of eight times earnings, UK shares, as a group, are now no longer particularly cheap. This week I’m going to confuse the chart by introducing a new measure, the market’s ten-year price earnings ratio, currently 14. I’ve only measured it twice, this week and last, and you can just see the line starting at the right edge of the chart.

The ‘long-term’ price-earnings ratio I have been reporting for the last couple of years has risen to 13, five points above its low in March and seven points below its high in December 2007. It may have been a little higher than that earlier in 2007, before I started measuring it.

Both ratios are median PE ratios of companies listed in London.

• The ten-year PE compares the price of a company to the average of the last ten years of profits for each company, so only companies with ten years of profits qualify.
• The 1-9 year PE compares the price of a company to the average of up to nine years of profits for each company, so companies with shorter stockmarket records are included.

Since most listed companies have been listed for a while, the two PE ratios should be very similar.

In time, I will probably switch to the ten-year PE because it’s a purer measure, but, for now, I’ll chart both as the history of the 1-9 year PE shows what happened to valuations during the financial crisis and the data is from different sources so each validates the other.

Right now, in rough terms, shares are approaching ‘fair value’, which explains why some of the bargains I’d identified before, no longer exist.

As promised, here are the not-so thrifty. Companies that were once cheap enough to merit inclusion in the Thrifty 30 but now I’m not so sure. For safety’s sake I’m leaving them out.

No longer Thrifty:

Since I wrote about them, the prices of Education Development International (EDD), Carluccio’s (CARL), ITE (ITE) and Victrex (VCT) have risen into speculative territory. Although they are probably very good companies, the probability that they are good investments is lower.

The prices of shares in these four are twenty or more times earnings. Victrex and EDI have long-term price earnings ratios of well above twenty.

Other things being equal that implies an annual return of 5% or less, unless these companies are much more profitable in the future than they were in the past. Maybe they will be, maybe they won’t, but I think it’s too big a gamble to take.

Shed Media (SHDP) is more tricky. Its price has risen 30% to 86p, but its seven-year price earnings ratio is just under 13. The shares are cheap enough to include in the Thrifty 30, if the company inspires enough confidence.

Shed announces its interim results later this month but encouraged investors with a statement in July that promised increased sales and profits.

More exciting, for traders with a short-term mentality at least, was an announcement the day before. The company revealed its executives are talking to private equity groups about a buy-out again.

The share price, therefore, is inflated by takeover speculation and investors with longer memories will remember this has come to nothing before.

If the buy-out succeeds, there may be some short-term gains, but that’s risky and not a Thrifty 30 trade. If it fails, the shares might fall into bargain territory again. Of course, they may not. After Thrifty 30 constituent OPD’s botched buy-out the price has soared, at least temporarily.

Weeks after I wrote about Celsis (CEL) in July it too was bought out by private equity at a premium of about 25% to the price I’d have ‘paid’ had I included it in the Thrifty 30 model portfolio then. I think its new owners got a pretty thrifty deal, which means, unfortunately, it’s not available now.

Still Thrifty:

Here’s the current members of the Thrifty 30 at yesterday’s close:

Notes:
The first transaction in the portfolio was on 9 September 2009
Cost includes £10 broker fee and £5 stamp duty
Cash earns no interest
Dividends are credited to the cash balance

Commenting on performance two weeks after starting a long-term portfolio would be ridiculous, so I won’t, except to say that the dead weight of cash will be a big influence until I’ve included more shares in it.

In fact, I won’t be able to say anything serious about performance until oooh, September 2014 as I’m aiming for a 15% annualised return over any five period.

And here’s the list of Thrifty 30 candidates, companies that, judging by the numbers alone, meet the Thrifty 30 criteria for value and financial strength.

Please scroll down to the bottom of the spreadsheet for explanations of the column headings. Some of the data is from Sharelockholmes.com, some is from Sharescope and some is mine. The companies are ranked so that the cheapest, strongest, most liquid candidates with the most up-to date financial data are nearest the top.

Maybe Thrifty:

I’m still plundering my back catalogue, as well as scouting for new companies like Solid State, the most recent inclusion in the Thrifty 30 last Monday.

Looking back, these companies may still be Thrifty: Delta (DLTA), Electronic Data Processing (EDP), Huveaux (HVX), Laird (LRD), Porvair (PVR) and T Clarke (CTO).

In theory:

Real contrarians are bullish now

Stateside, James Grant, says real contrarians are bullish now, because economists and investors are so pessimistic. Michael Panzner of Financial Armageddon disagrees.

An old obituary of Tony Dye reveals that the fund manager’s famous Cassandra-like warnings about the stockmarket in the late 1990’s were not the only time he was ahead of his time. He warned about the state of the global financial system too.

Economist Stuart Thomson predicts a WWW-shaped economic outlook over the next decade.

More evidence that booming economics do not breed booming stockmarkets, From the Empirical Finance Research Blog.

Markets are efficient much of the time, says Andrew Lo, but sometimes the ‘wisdom of crowds’ becomes the ‘madness of mobs’. Not so, say James Montier and Albert Edwards, mobs always rule.

Buying the S&P500 when its 10 year price earnings ratio is below average, and selling it when it’s above average, might beat buy and hold, says Steve LeCompte, but it’s probably not worth the effort.

Publishing is a dying industry says Paul Graham, the way to tell technological winners from  technological losers is to  determine whether they’re using technology to protect an existing source of revenue or giving people something new they couldn’t have before.

Value investing 101 from Columbia University’s Bruce Greenwald (video). Hat tip: Alex Garcia, Value Investing Pro

Hear, hear, Gregory Speicher spells out the importance of checklists.

Pity poor bankers, they’re not paid as much as sports stars.