7 Top "7-7" Shares Today

Published in Investing on 30 March 2012

Which are today's top seven shares with a P/E of 7 or less and a yield of 7% or over?

When a company's prospective price-to-earnings (P/E) ratio is less than 7 and the yield is 7% or over, something has got to give.

Weighing up which way things are going to give is the hard part. Either the share price rises to bring these two ratios back into a more normal kilter, or the earnings forecasts and dividend get cut. More commonly, there's a combination of these two things.

The 7-7 screen comes as a result of reading the book Free Capital; how 12 private investors made millions in the stock market by Guy Thomas. Among others, the book profiles well-known private investor John Lee, who writes regularly about his personal investments for the Financial Times. In fact, one of John Lee's current holdings makes today's shortlist.

Mr Lee follows straightforward value investing principles, paying particular attention to dividends. He describes his basic approach as DVD investing -- "Defensive Value and Dividends" -- looking for the "Double Seven" shares as a starting point for further research.

When I ran this test at Christmas the filter threw up a few interesting names that have put in a remarkably good performance over the first quarter of 2012. On 12 December 2011, the list looked like this:

CompanyShare priceForward P/E ratioForward yield
1. Aviva (LSE: AV)301p5.79.5%
2. TUI Travel (LSE: TT)152.2p5.38.3%
3. Intermediate Capital Group (LSE: LCP)226.2p6.58.2%
4. Playtech Ltd. (LSE: PTEC)226p5.77.2%
5. Cable & Wireless Worldwide (LSE: CW)17.24p3.813.7%
6. Smiths News (LSE: NWS)80.25p4.4511.5%
7. Thomas Cook Group (LSE: TCG)15.27p178.6%

40% average increase

Since the Christmas 7-7 screen, the FTSE has put on 4.1%. But the seven shares above have managed just over 40% on average at the time of writing, not including dividends paid.

The star performer has been Cable & Wireless Worldwide, which has almost doubled following the mulling of bids by Vodafone (LSE: VOD) and Tata Communications (NYSE: TCL.US).

Even the companies who don't make today's list as their dividend has been cut and/or earnings forecasts revised in a downwardly direction have still managed an increase, perhaps demonstrating the value of the exercise.

But beware -- the 7-7 screen is not 'investing nirvana'. This excellent average performance contrasts sharply with the previous screen which managed just over 1% on average versus the FTSE's 6% over the quarter.

Whether this is telling us anything useful is another matter. It should be used as an initial screen only for further research. Nevertheless, it's an interesting starting point.

The latest version of the 7-7 screen throws up the following top seven (based on current prices and using consensus broker forecasts for the furthest forward of 2012 or 2013 depending on the company's reporting timetable):

CompanyShare priceForward P/E ratioForward yield
1. Aviva (LSE: AV)331.7p5.98.5%
2. First Group (LSE: FGP)243.4p6.210.4%
3. Smiths News (LSE: NWS)90.6p510.5%
4. Interior Services Group (LSE: ISG)134p5.411.3%
5. GVC Holdings (LSE: GVC)138p3.617.4%
6. Begbies Traynor (LSE: BEG)31.4p4.87.8%
7. Macfarlane Group (LSE: MACF)18p5.49.2%

There are some crazily high and low figures on there, which clearly indicate the need for further research and a caution. But the last time the screen was run, the "stand-out" stats were telling us the shares were undervalued.

Foolish favourite Aviva remains in number one position having been as high as 382p in February, and having gone ex-dividend to the tune of 16p.

There will almost certainly be some excellent bargains on the list as there were last time. What do you think? Are there any on the shortlist you think worthy of further research? I will be having a closer look at each and will report back if I find anything is a stand-out buy in my opinion.

> Get the latest on investing and the markets, direct from the desk of David Kuo. You'll also receive a special free report on '10 Steps To Making A Million' if you join The Motley Fool Collective today.

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> David owns shares in Cable & Wireless Worldwide and Aviva.

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theRealGrinch 30 Mar 2012 , 3:23pm

only one "bargain" I can see, the rest are bets

atalbot9 30 Mar 2012 , 6:00pm

Grinch - which one?

I own Aviva and have just doubled up on FGP after the drop - would be good to get TMF's view on this one. I notice IC have just downgraded it to "sell".

mrburns2050 30 Mar 2012 , 6:17pm

I own Aviva, been adding to little by little.

Also looked at First Group a few times. But never committed to buying.

jaizan 30 Mar 2012 , 9:08pm

I have a holding in Begbies & CWW (doubting the wisdom of the latter selection).

John Lee has reported holdings in ISG and Smiths in his monthly FT columns previously.

wokingblade 02 Apr 2012 , 1:41pm

This is a great series David, keep it up.


dukindiva 02 Apr 2012 , 4:12pm

The 7/7 screen seems dodgy in isolation; ask anyone with shares in TCG.

If the screen is different each time you run it (only AV & NWS appear on both) then the benefits must be short lived. Don't forget, if dividends seem too good to be true..... they probably are.

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