Searching among the Footsie for value plays.
I haven't done one of my mechanical index value trawls since last November, and things may have changed since then, so I'll repeat the FTSE 100 search today to see what's happening. For those unfamiliar, it's a simple process I devised a long time ago for locating potential value plays by a series of three mechanical filters applied to a share database, price-to-earnings (P/E) ratio, yield and P/B, in order to produce a short list for further investigation. I don't do a net debt filter because that would exclude banks that always have high debt, and I have no wish to exclude them from the realm of potential value shares.
The idea is that the more table appearances a share displays, the greater its likely value. Scoring in all three lists is therefore the highest aim here.
In addition, the process often reveals by the presence of several shares in the same business, whole sectors that are currently unpopular. Further research into such sectors might identify attractive value plays apart from those companies featured in the tables, for example, because their ratios lie just outside those caught here.
Before we start…
Note that the yields and P/Es are forecasts, while the P/Bs are last full-year actual. There may be more recent information available but I have not taken that into account. Book in the P/B calculation refers to net assets, not net tangible assets, because that is the way the information was presented. Value players, though, will be more interested in net tangibles, which is something readers will have to work out themselves.
Also, do note that there are often errors and omissions in databases so an investment decision must not be made solely on the basis of second-hand figures like this. Further research to verify figures back to the company's own accounts is essential before reaching for your wallet, although you don't need to overanalyse.
Here we go then:
Top 10 yields
Ten lowest P/E
Ten lowest P/B
What we found
The first search is for triple showings and there are none this time, same as last November. We do though have a lot of doubles.
- Non-life insurer RSA appears in the yield and P/E lists as do weapons manufacturer BAE Systems and pharma AstraZeneca.
- Insurers Aviva and Resolution feature in the yield and P/B lists.
- Banker Barclays shows up in the P/E and P/B tables with Shell B another.
Looking at sectors that are over-represented, the insurance story continues. This has been going for quite some time now over several of these trawls I've published here. Sooner or later it will end, because sectors just don't remain out of favour, or in favour either, forever. Instead, they cycle -- but I have no idea when the run will cease.
I do know though that such situations can hang around for a long time, so it's no surprise to me. That's why great patience is required for value investing to work. Meanwhile, there are some cracking yields on those insurers to sweeten the wait, with this industry taking five of the 10 top yield places.
To illustrate the cyclical sector effect, some time ago the tables would have been heavy with utilities among the yields, and property companies would make a big showing in the P/B list. Now both of these sectors are conspicuous by their near absence. National Grid scores as the sole ute in the high yielders, and Hammerson waves the flag for property in the P/Bs.
Another sector making its presence felt here is banking as indicated by RBS, Barclays and Lloyds all around the top of the P/B table, with Barclays also a low P/E candidate. Though it's not a high yielder, it might be worth pointing out that Barclays is the only one of these three to be paying dividends.
A third sector distinctly out of favour as indicated by several representatives here is mining and oil. This is particularly the case in the P/E table, with a much smaller showing in the P/B list. However, the sector is absent entirely from the high yield figures.
Where does value lie?
The key thing for value players to consider is whether any value shown by individual sectors is owed more to reality or to mere poor sentiment. Value lies in the latter but it is not necessarily easy to determine which it might be.
Is the high turnout here by financials like banks, insurers and fund manager Man Group deserved, perhaps a continuing hangover from the recent crisis amid fears that it aint quite over yet? In mining and oil, are concerns about a downturn for minerals arising from a business recession overdone?
That's all a bit too macro for me as a value investor, I prefer to concentrate on the merits of individual companies but people see value differently, it's not a precise thing. I leave readers to answer the questions and see if they can find any value worth buying in the shares or sectors revealed by this trawl.
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> Stephen owns shares in Aviva, BAE Systems, Barclays, BP, Lloyds and National Grid.