This Value Screen Is Doing The Business

Published in Investing on 15 June 2012

A share screener seems to be delivering the goods so far.

At the start of the year, I devised a value screen designed to get the best of all worlds. And it seems to be doing well so far.

Value screens often throw up boring companies, which is partly the point in doing them. As David O'Hara pointed out last week, there are plenty boring shares that have ten-bagged.

In other words, companies that are relatively ignored often outperform. They also tend to be a little more contrarian in nature, which is usually a good thing.

Having said that, value screens based mainly on assets and low price-to-earnings (P/E) ratios generally don't throw up growth stories (though they still can occasionally). They're also no guarantee of success and shouldn't be followed mechanically in my opinion. A screen tends to churn out the same names and only partially accounts for how competitive a business is. So I prefer to dig deeper in each case and apply a little qualitative judgement.

The screening formula used 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%. 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.

This trawl then came up with a shortlist of nine companies, as follows, by descending order of the then market capitalisation:

CompanyOpening price 3 JanuaryClosing price 12 June
Cable & Wireless Worldwide (LSE: CW)16.25p35.3p
CSR (LSE: CSR)183.5p200.4p
Keller Group (LSE: KLR)266.5p380p
Fyffes (LSE: FFY)31.75p32.25p
Game Group (LSE: GMG)8.5p0p
Fairpoint Group (LSE: FRP)48p64.5p
North Midland Construction (LSE: NMD)140p135p
United Carpets Group (LSE: UCG)5.75p3.75p
Straight (LSE: STT)28p36.5p
FTSE 100 (UKX)5,572.35,483.8

The performance has been good so far. The overall mean average improvement is 10.65% versus the FTSE's 1.6% drop.

The weighted investment performance, though, has been a remarkably good 51%. This is a theoretical investment in each of an amount in direct proportion to its market capitalisation.

This is a bit of a cheat as it skews the statistics hugely thanks to the performance of the largest, Cable & Wireless Worldwide, which also happens to be the best performer on the list. But such a weighted approach does have merit if you believe that larger is also generally safer.

The telecoms group has more than doubled following the weighing of bids by Vodafone (LSE: VOD) and Tata Communications (NYSE: TCL.US). It is now the subject of an agreed bid from Vodafone at 38p, which may or may not go through.

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

Running the screen now

Happy with the weighted performance, I decided to run the screen again. Unfortunately, this repetition only generated three names today. It's mainly the requirement for a decent slug of tangible book value that finds them out. And two of the companies are already on the shortlist, namely Fyffes (LSE: FFY) and United Carpets (LSE: UCG).

The one newcomer is the provider of specialist engineering services to oil and gas companies, Lamprell (LSE: LAM). Unfortunately, the shares have already moved ahead by 11.6% today. This movement isn't down to me having found Nirvana with the screener, sadly; instead, the company has announced the successful delivery of a drilling platform.

A number of Fools looked at Lamprell recently, questioning the timing of directors' share sales shortly before a profits warning.

Of the others, I think Fyffes looks like a solid investment, if only for the 6.6% yield -- though it's one I haven't made as yet. I may need to relax the criteria to cast a wider net, though I'll keep running the screen from time to time and report back on any new names.

Finally, let me finish by adding that more share ideas can be found within this Motley Fool report: "8 Shares Held By Britain's Super Investor". The guide reviews the investing approach and portfolio of City dividend legend Neil Woodford and is free to download today.

Further investment opportunities:

> David owns shares in Cable & Wireless Worldwide. He doesn't own shares in any of the other companies mentioned.

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MrChriss 15 Jun 2012 , 2:30pm

Can I ask which site you used to run this screener? When I use Digital Look and ADVFN I often get completely different lists.

apprenticeDRL 15 Jun 2012 , 3:25pm

Fyffes have been on my watch list now for a month or so.

They have increased revenue and profit for the last couple of years and EPS growth for the last 2. I make them on a PE 0f 6.5 with a dividend of 1.93c giving a yield of about 5% depending on which currency converter you use. The current calculation for NAV is 30p with an operating margin of 2.1% and P/B of 1.0.

I am holding off until after the Greek elections as the market may get hit hard depending on the results.

ablench 19 Jun 2012 , 8:21pm

No issue with the content of the post, but will people please stop using the phrase 'mean average'. There's no such thing. The mean is the average; they are the same thing, you don't need to use the two words together. I don't know where this usage came from, but it is nonsense and suggests you are mathematically incompetent - which I hope is not true.

moreuseless 19 Jun 2012 , 10:30pm

I have to disagree with ablench as the mean is not the average - only one of them. In fact there are three averages; mean which is the sum divided by the number; the mode which is the most common and the median which is the number in the middle. One should also look at the standard deviation which tells you how close the majority of numbers are to the mean. Of course you then get into distributions, skewed etc.

Averages can be useful but should not be relied upon without other information. Mean is probably the worst as it can be skewed by a single high (low) number - referred to as an outlyer.
The best is when all three averages are similar.
Always be wary of statistics!

HKres 20 Jun 2012 , 1:54am

ablench is correct. Only the mean is the average. Nether the mode nor median are the average, moreuseless.

koochak 20 Jun 2012 , 10:57am

moreuseless is right. Although "average" is usually understood to be the "arithmetic mean" in everyday language there are other ways of defining an average. Examples are mode, median, geometric mean etc.

koochak 20 Jun 2012 , 10:59am

Put another way: The "average" person uses "average" to "mean" "mean"!

GladToBeGrey 20 Jun 2012 , 11:33am

ablench and HKres are incorrect ... one might even go so far as to say 'mathematically incomp...' but we won't.

moreuseless and koochak are correct. There are several ways to compute an 'average' (or a 'measure of central position').

The 'arithmetic mean' (the OPs 'mean average') is the simplest, most used and the one that is generally meant by the term 'average' in everyday speech. However, there are several type of 'mean' (for example weighted, geometric, harmonic), as well as mode and median. All are 'averages'.

Hence, it is a requirement for accuracy to specify the type of 'average' being used; the figure alone is strictly meaningless.

I refer you to my aged A Level Statistics textbook ...

bitconfused 20 Jun 2012 , 6:27pm

Never trust an average, I have one foot in the hot chip fat and one in the freezer.
My feet are at average temperature.

If you disregard the top 10% and the bottom 10% and compute the rest you may be getting an average with some very slight meaning, but use only as a reference and not as a guide.

BenjiBenji 18 Mar 2013 , 7:36am

What business class have you graduated from? You seem to have an edge over other market analysts? I have read you article and you come up with new ideas.

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