My Value Screen Is Going Great Guns

Published in Investing on 13 April 2012

A more stringent value shortlist seems to be doing the business so far.

Value screens often throw up boring companies. And that's partly the point in doing them. Companies which are relatively ignored often outperform. They also tend to be a little more contrarian in nature, which is usually a good thing.

At the start of the year, I ran a value screen which was tightened up on the previous year's equivalent.

The 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, and a minimum prospective dividend yield of 3.5%. But I also added in a price to tangible book value maximum of 1.4 and a maximum price to cash-flow ratio of 6.5.

The mechanical trawl came up with a shortlist of nine companies. The table below lists them by descending order of market capitalisation and shows their share price movement from 3 January 2012 to 13 April 2012.

Company% change
Cable & Wireless Worldwide (LSE: CW)121%
CSR (LSE: CSR)17%
Keller Group (LSE: KLR)66%
Fyffes (LSE: FFY)12%
Game Group (LSE: GMG)-100%
Fairpoint Group (LSE: FRP)28%
North Midland Construction (LSE: NMD)7%
United Carpets Group (LSE: UCG)-24%
Straight (LSE: STT)67%
FTSE 1002.5%

The performance has been an excellent one so far. The overall mean average improvement is 20.5% versus the FTSE's 2.5%.

The weighted investment performance would have been a remarkably good 61%. This is a theoretical investment in each of an amount in direct proportion to its market capitalisation.

This is, admittedly, a bit of a cheat as it skews the statistics hugely thanks to the performance of the largest, Cable & Wireless Worldwide. The telecoms giant has more than doubled following the weighing of bids by Vodafone (LSE: VOD) and Tata Communications (NYSE: TCL.US). But such a weighting does have merit if you believe that "larger" generally equals "safer".

Of course, the worst performer has been Game Group which went into administration as its suppliers lost confidence in the company's ability to pay up.

Automaton or individual?

It's important to note, though, that this is an exclusively mechanical screen. Whether you follow such screens slavishly or try and apply a little of your own judgement is a moot point. When we start to apply personal qualitative judgements, the tendency is to get swayed along with the rest of the market, which in some ways, defeats the object.

Nevertheless, I wouldn't like to be an automaton. But, when I ran this screen back in January, I had a closer look at each company on the list and decided not to invest in any. I was already invested in Cable & Wireless Worldwide at higher prices, and decided not to average down. I came close to buying into both Keller and Fyffes, but shrewdly decided not to!

Perhaps this proves the point that we should let the numbers do the talking? But that takes the fun out of things.

Anyway, I will run the same filter again soon to see what candidates are generated now, and will revisit the above list of nine to see how they're faring in a few months' time.

In the meantime, what are your views on the merits of such screens? Should we apply our own thinking, using them as a starting point only – or does that defeat their very purpose?

> 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.

> David owns shares in Cable & Wireless Worldwide.

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Comments

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theRealGrinch 13 Apr 2012 , 1:36pm

looks like you are "betting"

mcturra2000 13 Apr 2012 , 6:23pm

"what are your views on the merits of such screens?"

It was just luck - you adopted an investing style that just so happens to have paid off for Q1 of this year.

F958B 14 Apr 2012 , 3:32pm

mcturra

When the water is rising, even excrement floats.

When the tide goes out, we soon see out who was swimming naked.


In other words:
When markets are recovering (e.g. post-autumn-2011) those shares which fell the most will tend to rebound the most on hopes that the company can fix its problems (or that the anticipated problems don't materialise) before the next downturn.

When a sudden downturn hits, it is the weak companies - often "value traps" - which are most likely to see their share price flattened.

/

So if investors want to play the value game, they are more likely to see exceptional returns in bull markets, and more likely to see disastrous returns in bear markets.

Tamilyrn 16 Apr 2012 , 12:16pm

@ F958B

Value investing for me is buy depressed shares which are depressed as a result of sentiment and not fundamentals. Sell when the strength of the fundamentals is recognised by the market or when more data becomes available which changes the valuation.

Indeed, since value plays are plays on fundamentals and should be made without regard to popularity I would argue that they are amongst the strongest of companies rather than the weakest.

Bull or bear largely serve to define market momentum. Admittedly I sell more in bull markets and buy more in bear markets but in either case the decision is made on the numbers.


OldJock 16 Apr 2012 , 6:17pm

mcturra, F958B & Tamilyrn...

Can you help to explain how you tell the difference between 'solid value' and a 'value trap'?

ATB,

Old Jock

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