Tweaking The Value Screen For 2012

Published in Investing on 3 January 2012

A more stringent value shortlist throws up some interesting candidates.

Leaner investing times perhaps call for more careful value measures.

Last year, I thought I'd found steady investing Nirvana with my value screen, which had consistently generated market-beating returns. But it all went a little "Pete Tong" during 2011, failing to beat the market averages.

This doesn't necessarily tell us anything of great value. A year is too short a timescale to measure. Nevertheless, it was useful in encouraging me to tighten things up a little in the direction of a safety first approach. And it was a useful exercise in generating candidates for further research.

Last year's formula

Last year's formula consisted of sifting for value using a P/E maximum of nine, a price-to-book value (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%.

So I repeated the screen for the new year, but made the adjustment of deleting the requirement for growth, as this is more of a value-based screen and growth can fizzle away more easily than assets.

This generated an automatic macro list of 28 potential stocks as follows:

CompanyShare price
Acal (LSE: ACL)173p
Autoclenz Holdings (LSE: ACZ)25p
Brulines Group (LSE: BRU)77.5p
Cable & Wireless Worldwide (LSE: CW)16.25p
Cello Group (LSE: CLL)34.75p
Charles Taylor Consulting (LSE: CTR)127.12p
Communisis (LSE: CMS)26.88p
Creston (LSE: CRE)70.5p
CSR (LSE: CSR)183.5p
Cyril Sweett Group (LSE: CSG)20p
Dods Group (LSE: DODS)5.12p
Fairpoint Group (LSE: FRP)48p
Fyffes (LSE: FFY)31.75p
Game Group (LSE: GMG)7.5p
Holders Technology (LSE: HDT)110.5p
Huntsworth (LSE: HNT)35.62p
Interior Services Group (LSE: ISG)162.5p
Keller Group (LSE: KLR)266.5p
Latham (James) (LSE: LTHM)233p
Logica (LSE: LOG)61.7p
Macfarlane Group (LSE: MACF)18.5p
North Midland Construction (LSE: NMD)140p
Shore Capital Group (LSE: SGR)16.5p
SQS Software Quality Systems (LSE: SQS)150p
Straight (LSE: STT)28p
T Clarke (LSE: CTO)41.25p
TUI Travel (LSE: TT)165.8p
United Carpets Group (LSE: UCG)5.75p

Tightening for real value and cash flow

So, at the moment, this is a weaker list of requirements than the previous year's. But insisting on those assets to be tangible, in the main, and setting a price to tangible book value of 1.4 takes just over half the candidates out of the mix.

And as a final filter to maximize the safety of the shortlist, setting a maximum price to cash-flow ratio of 6.5 whittles the list down to nine. This final filter concentrates on cash as the real lifeblood of a company and should help rule out disasters.

The nine candidates remaining by descending order of market capitalisation are:

Cable & Wireless Worldwide£435m
Keller Group£171m
Game Group£26.1m
Fairpoint Group£20.9m
North Midland Construction£13.7m
United Carpets Group£4.7m

Thus far, this has been an exclusively mechanical screen. And I won't meddle in that process, as that would defeat the object of such a filter.

I think both the long and shortlists above throw up some interesting value candidates that could well enjoy a prosperous 2012. All I would say is that this is a starting point for further research only, in my opinion. 

On that basis alone, it will be interesting to see how these nine companies fare. And I'll review the list after six months to see how they're doing. But if you can shed any further light on any of the above companies' prospects, please feel free to do so in the space below.

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More from David Holding:

> David owns shares in Cable & Wireless Worldwide and James Latham.

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7Kiwi 03 Jan 2012 , 7:31pm

C&W Worldwide have announced they are ceasing their dividend shortly, so they will now fail your filter.

Tykethat 04 Jan 2012 , 5:58pm

Game Group won't be far behind either.

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