Today I’m dipping my toe into the world of value, a world that put legendary investor Walter Schloss on the investment map. For those of you not familiar with the name, Schloss did not attend college, and at the age of 18 started work as a runner on Wall Street. He took investment courses taught by Benjamin Graham at the New York Stock Exchange Institute. Schloss eventually went to work for Graham in the Graham-Newman Partnership.
However, in 1955 Schloss left Graham’s company and started his own investment firm. During his tenure, Schloss averaged a 15.7% compound return over the course of four and a half decades – I know investors who would give their right arm for returns like that!
In a 1994 shareholder letter, Warren Buffett wrote: “Walter continues to outperform managers who work in temples filled with paintings, staff and computers. And he accomplishes this feat by rummaging among the cigar butts on the floor of capitalism.“
Cigar butts
And it is on that note that we try and mimic Schloss and some of his methods. In this particular screen, taken from Stockopedia, I’ve selected three interesting companies: Monitise (LSE: MONI), Blinkx (LSE: BLNX) and Falkland Oil and Gas (LSE: FOGL).
The screen uses value and price factors as its main rules. It searches for companies that are trading below book value, using the price to book ratio, and at prices that are close to new lows. As we can see from the chart, all three shares are at or around new lows – but can investors get that last profitable puff from them?
Just by way of a warning, this type of investing can come with plenty of risk. Accordingly, those averse to risk should size their position according to their tolerance level, as the underlying businesses can often take a turn for the worse and leave investors with a sizeable loss.
That said, things are looking interesting for some of these companies – let’s look at each in turn…
An opportunity for MONI?
Investors in Monitise have had a torrid time over the last 12months. However, brokers have begun to sound more positive on the stock, with losses per share expected to half from -1.2p this time last year to -0.6p currently, and the broker consensus price target is 211% higher than the current 3p per share. At year end, management said that the company had cash of nearly £89m – that’s more than the current market cap of £66m — however, this is expected to reduce to around £45m throughout 2016. The board were keen to re-emphasise that they believed that the company had enough case to see the business through to EBITDA profitability for the year ending 2016.
On the negative side, a key management figure, Elizabeth Buse, left the company in order to return to the United States. This was just one of the announcements to spook investors – but has this created an opportunity? Only time will tell.
Beware BLNX
Another former growth star that has sold off from a high of over 200p in January 2014 is Blinkx. Investors have called into question the sustainability of its business model. Indeed, on 17 November management announced another adjusted EBITDA loss of nearly $7m; however, management say that the company has over $82m in cash.
According to Stockopedia, book value is 0.77 (anything less than one indicates good value) but caution should be used here, and the metric not used in isolation. In my view, assets are only worth what the market is prepared to pay – and it isn’t always on the positive side.
New FOGL
Last up is Falkland Oil and Gas, which agreed to merge with Rockhopper Exploration on Tuesday. Though the proposed deal requires approval from both Falkland and Rockhopper shareholders, it may well prove to turn out to be a sensible deal. Indeed, Rockhopper also appears on the screen, and brokers have price targets for both shares that are more than double their current price.
As with every other oil and gas explorer, both businesses are burning through cash. At the end of June, Falkland had $40m of cash, down from the $95m at year end, and it is likely that this is running out despite efforts to control costs – the last thing that shareholders want is a dilutive rights issue. As such, in my view it makes sense to tie up with other operators, as it should allow the enlarged company to reduce costs moving forward.
You pay your money…
In summary, here are three businesses that, if brokers are to be believed, could well double your money. However, if the price of oil dips or business models prove to be not fit for purpose, then you could just as easily lose 50% of your hard-earned cash.
