Value In The Mid-Cap Market

Published in Investing on 19 April 2012

Stephen Bland looks for value in the FTSE 250.

Following on from last week's mechanical trawl of the FTSE 100 for value, I'm repeating the exercise this week on the market's mid caps in the FTSE 250 index. Similar warnings apply about the potential errors of the database I used, and that price-to-book (P/B) ratio includes all assets and not just the value player's far more desirable and conservative tangible asset version. My natural indolence precludes my working out price-to-tangible book value (P/TB) so readers must do this for themselves for any share considered worthy of further investigation.

Yields and price-to-earnings (P/E) ratios are forecasts, while P/Bs are based on the last annual accounts, not updated for interims or news.

Top 10 yields

 PriceForecast yield (%)
FirstGroup (LSE: FGP)20211.7
C&WC (LSE: CWC)309.6
Kesa (LSE: KESA)578.5
Phoenix (LSE: PHNX)5277.8
Amlin (LSE: AML)3307.9
Halfords (LSE: HFD)2927.4
Interserve (LSE: IRV)2897.4
Go-Ahead (LSE: GOG)1,1507.2
Int Cap (LSE: ICP)2627.2
Inmarsat (LSE: ISAT)4267.2

Ten lowest P/E

 PriceForecast P/E
Phoenix (LSE: PHNX)5274.1
Petropavlovsk (LSE: POG)4945.0
Exillon (LSE: EXI)1366.2
Northgate (LSE: NTG)1956.3
Int Cap (LSE: ICP)2626.4
Catlin (LSE: CGL)4257.0
Logica (LSE: LOG)837.3
Bumi (LSE: BUMI)5488.1
AB Gold (LSE: ABG)3588.2
F&C AM (LSE: FCAM)668.5

Ten lowest P/B

Home Retail (LSE: HOME)1010.31
Phoenix (LSE: PHNX)5270.39
Barratt (LSE: BDEV)1360.44
Bumi (LSE: BUMI)5480.46
Investec (LSE: INVP)3560.54
3i (LSE: III)1920.55
Daejan (LSE: DJAN)3,2000.62
Heritage Oil (LSE: HOIL)1440.63
F&C AM (LSE: FCAM)660.64
C&WW (LSE: CW)300.65

The primary search is for triples, and we score this time with Phoenix Group Holdings, which is a specialist life insurers that manages closed life funds.

As usual with this exercise, there are number of doubles -- though only three this time, fewer than usual. Intermediate Capital, a corporate finance business, appears in the yield and P/E lists. Miner Bumi and fund manager F&C Asset Management show in the P/E and P/B tables.

Sector trends

Sector trends revealed by these trawls are always interesting in my view, an indication that further research among sectors revealed here as cheap may well throw up some interesting value plays outside of those caught by these tables.

Continuing the story shown by my FTSE 100 search last week, mining and oil features strongly here. Petropavlovsk, Exillon, Bumi and African Barrick Gold make up four of the lowest P/Es, while Bumi and Heritage Oil score in the P/Bs. These shares are all noticeable by their absence from the yields, though.

Also as last week, insurance features here, with the aforementioned triple scorer Phoenix Group plus Amlin in the yields and Catlin in the P/Es.

I can see a bit of a retail theme arising, with Kesa and Halfords as yield plays, and Home Retail -- owner of Argos -- as an asset situation. Kesa used to own the Comet electrical retail chain, though I understand that they disposed of it for nothing last year and now are based in the same business but purely in Europe.

Bus and rail operators FirstGroup and Go-Ahead both make the high yield list, though they don't make the other tables.

Fund managers Investec and F&C Asset Management show in the P/Bs as does venture capital investment fund 3i, with F&C also in the P/Es.

Foolish takeaway

For me, the most interesting sector for further research taking last week and today together is probably mining and oil, with insurance as a further possibility. Some shares in the resources sector are pretty cheap and it is possible to find decent yields among them as well if that concerns you -- primarily with the bigger caps, because the smaller ones frequently pay no dividends.

It's often a volatile sector, but that's not necessarily a bad thing for a value player. Resource shares are down due to fears over falling prices for their commodities. But these situations are frequently overcooked by investors, both on the downside and the upside.

The difficulty is gauging where we are in the oversold/overbought cycle. Cheapness may tell us that we are well into the former, but it can mislead sometimes because cheap can get much cheaper; even if it doesn't, it can stay that way much longer than many investors have the patience to bear. That is one reason why I like yield in a value play -- it gives you something while waiting, and that wait can be very long on occasion.

Apart from mining, insurance has been cheap for a long time now with no obvious signs of the turn. Value investors have been rewarded by fat yields but may be showing chunky losses. I know I am on my Aviva play.

But when do you go in? How long do you wait if you are in? Don't know is my answer on both counts. What I do know from experience is that when the turn comes, it is almost always unexpected. Something catches investors' attention, and if we are talking big caps then it is the institutions who matter, not the private individual, and suddenly they all turn bullish. But the timing of that turn is not predictable. If it were, we'd all buy no earlier than just before.

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> The Motley Fool owns shares in Halfords.

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goodlifer 19 Apr 2012 , 1:57pm

I'm particularly interested in any thoughts on HFD or CWC, with both of which I'm lumbered.

atalbot9 19 Apr 2012 , 5:48pm

Would also be useful to get your views on FGP in a bit more detail - not having a dig but it was named a "no-brainer" before a 30% drop - would be good to know if you still see value in it.

sliverfox101 23 Apr 2012 , 1:33pm

interserve p/e is between 6 and 7 on the sites I can see. Any reason it didn't show up in your analysis Stephen? Thanks

sliverfox101 23 Apr 2012 , 1:36pm

interserve p/e is between 6 and 7 on the sites I can see. Any reason it didn't show up in your analysis Stephen? Thanks

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