My Value Screen Does It Again

Published in Investing on 20 June 2011

This value screen is beating the indices so far -- but are there still big bargains on the list?

At the start of this year, I reviewed a mechanical screening for value technique using my own patented formula which produced some excellent index beating returns during the previous 18 months.

The success of the formula led me to repeat the exercise for 2011 and as we're now at about the halfway stage, I thought it would be interesting to see how the 30 companies are doing so far.

Big success in the past

In the previous test, the performance was excellent. Over 18 months or so, the top list of 10 companies increased in value by a mean average of around 37%, the FTSE 350 half dozen didn't do as well managing just 5.2% on average, whilst the wider list of 15 managed a huge 61% mean average improvement.

The overall mean average improvement was 43% -- not including dividends. Over the same period, the FTSE 100, FTSE 350 and FTSE All Share indices each added around 28%.

The magic formula

The formula consists of sifting for value using a P/E maximum of nine, a PBV maximum of one, net gearing of 30% or less, a minimum prospective dividend yield of 3.5% and prospective earnings per share growth of at least 10%.

Please note -- the screen is my own and is designed to look at a number of value parameters simultaneously to give a balanced picture -- but with the emphasis on book value, low debt, earnings, yield and growth.

With such an exhaustive list of requirements, it's little wonder that the screen needs to be slackened off both to pull in some FTSE 350 companies and a few more from the FTSE All Share index.

So without further ado -- let's have a look at who the nominees for 2011 were. The 2011 screen generated the following list of 13 companies. In each case, the mid price at the end of December, and the mid price at the time of writing are shown:

The mean average improvement is close to 8% with Galliford Try (LSE: GFRD) the star performer (and a previous Stephen Bland selection for Foolish readers).

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Then relaxing these criteria a little to generate more blue-chip screened bargains, I searched the FTSE 350 with a maximum P/E of 12, PBV of 1.5, gearing of 40%, yield of at least 4% which is covered at least 1.2 times, and removed the requirement for earnings growth, which generated five names:

As you can see, these haven't fared quite so well – managing to lose a mean average of 4% not accounting for any dividends paid.

Widening the same search to the FTSE All-Share index on the same basis added in:

These shares have put on a mean average of 7% in the six months -- with Eaga the star performer courtesy of its takeover by Carillion (LSE: CLLN).

Overall score vs. the indices

The overall mean average increase for the 30 companies thrown up by the screen is 6% -- not bad when compared to the FTSE 350 and FTSE All Share indices which have fallen by 3% over the same period.

I make no claims whatsoever for the merits of screening in this way -- other than as a useful staring point for further research. Also, the screen doesn't correct for tangible book value, thus flattering some balance sheets for value hunters.

Nevertheless, the findings are interesting and I will revisit the 30 companies at the end of the year -- and repeat the test for next year. I strongly suspect that some the best second-half performances will come from some of the dunces on the list at half time.

More from David Holding:

> David owns shares in PV Crystalox Solar, AIREA, and BP.

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Comments

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Tri2000 20 Jun 2011 , 4:59pm

From the final selection of 12 (All Share group), 7 have lost money and 5 have gained. The biggest gain has come from a takeover - something that the screener could not have foretold. Take out this 'star' and the overall gain is only 1.4%.
Like all screeners it is good for ideas, but you can't avoid a bit of detailed research to try and weed out the duds.
Saying that, I will look forward to the next instalment to see if things improve.

geddinquick 21 Jun 2011 , 8:17am

Tri2000 - "I make no claims whatsoever for the merits of screening in this way -- other than as a useful staring point for further research."

divitiae 21 Jun 2011 , 12:15pm

was it picked to be taken over because of factors expounded by the screen?

MrContrarian 21 Jun 2011 , 3:59pm

The biggest gain has come from a takeover - something that the screener could not have foretold.

Takeovers are more frequent among value shares. As the old saw says, the harder I work the luckier I get.

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