This week’s shares: Britvic, Brewin, Euromoney, Formation and Dewhurst
Posted on January 8, 2009 by Richard Beddard
Filed Under Ramblings |
Pushbutton hero is pick of the bunch
Piotroski taught me the importance of looking at annual reports when evaluating smaller, unfashionable companies. It’s easy to shuffle glibly through doorstoppers from FTSE companies, indeed if you committed yourself to reading them thoroughly you’d probably retire before you’d read enough to invest all your money.
Happily, the size and complexity of annual reports seems to be proportional to the size and complexity of companies. Piotroski’s discovery, though, is rather more exciting. Annual reports are often the only source of financial information for smaller companies. What’s more, they are largely ignored by the City, because the companies are often too small to invest in, and journalists, because not enough people are interested in them.
So, to sum up: Studying a large company’s annual report is exhausting and ultimately futile because its financial situation is widely reported by analysts and journalists. Studying a smaller company’s annual report is much easier, and you might actually get information you can use to your advantage, because so few other people are looking.
Piotroski demonstrated this statistically (see his paper (pdf)). I’m just explaining why my method of investing starts with the annual report.
Since a company’s market capitalisation, the value of all its shares, determines its size, bargain stocks tend to be smaller companies. Every week I screen the market for cheap companies, with profitable pasts that have recently published their annual reports. Then I calculate their F-Scores , a measure of their financial strength, using data from thee annual reports and decide whether they might make good articles, or investments.
This week there are five, here are my initial thoughts:
- Brewin Dolphin (BRW), an asset manager with a low F_Score and erratic earnings,
- Britvic (BVIC), home of Robinson, Tango and Pepsi. It’s profitable enough, but it looks like shareholders own a tiny proportion of what they owe. I’m guessing, but from its (relatively) short stockmarket history, I’d say it’s been Tangoed by private equity.
- Euromoney Institutional Investor (ERM), a profitable publisher dependent on a big loan from DMGT, parent of the Daily Mail. To my mind that means we have to worry about the financial strength of two companies not one.
- Formation Group (FRM), which seems to be a property company and an agent for football players and celebrities. It’s F_Score is three out of nine, which makes it a risky investment and as if that weren’t enough its auditor appended a note after its unqualified opinion on the accounts emphasising items which seem to call the company’s future viability into question.
- Dewhurst (DWHT). Though I wouldn’t rule Euromoney and Britvic out, it’s Dewhurst, which makes pushbuttons for lifts and ATMs, that’s the pick of the week. However, my 45 minutes is almost over, so you’ll have to wait until next week to find out why, and whether I have any reservations*1.
Footnotes:
- I know, I said I’d blog every day, but tomorrow I’ve got the day off
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[...] Before I talk about this week’s shares tomorrow, I promised more on Dewhurst (DWHT), last week’s pick of the week. [...]