Value Pick: IG Group

Stephen Bland rekindles his value investing series with a look at IG Group.

As indicated last week I'll be directing my attention for the time being primarily on value investing. For any unaware newcomers, value is a short-term trading strategy concerned with shares that appear unreasonably cheap, thus possessing "value", on various commonly used fundamental characteristics such as Price/Earnings, Price/Book, Dividend Yield and so on. Short term can mean anything up to a couple of years or so, maybe more, and occurs when the share has been what I call "outed", that is the market has driven up the price to eliminate the under value.

Or as sometimes happens, the share goes wrong in which case you have to be prepared to take a hit. No trading strategy can deliver a win every time and don't believe anyone who claims to have found such a scheme. All that trading, any style, can do is hope to produce a sufficient proportion of winners for a decent overall profit to be made compared with the capital at stake.

Note that value, which seeks short term gains by trading shares, is in direct contrast to my other interest of High Yield Portfolio investing which seeks long-term income from holding shares. I have written extensively on the Fool about both over the years.

This week's example...

Enough basics then, I'm looking this week at IG Group (LSE: IGG) which caught my eye earlier this year when I was doing a trawl for possible value plays, focussing on net cash. In fact I liked it so much I bought the company, well a bit of it anyway, so this one is a money and mouth job for me thought that won't always be the case with the shares I feature here.

IGG is a bookmaker specialising in financial markets. Betting is a mug's game, over time the great majority of punters lose, but this doesn't mean as some might think that bookmakers' profits are wholly certain or highly predictable. The reasons are that there is competition between them and they can have very high costs too at times.

A few fundamentals:

One point which sticks out in the above is that this share has very limited tangible asset cover. It has much more in total assets but a great deal of that is goodwill and other intangibles. I prefer tangibles, stuff you can kick, when looking at value play assets. On this measure the Price/Book ratio for IGG at around 9 is abnormally high by value standards, under 1 being the preferred measure, so this aspect of the value criteria is not present here.

What we do have is a decent and forecast rising yield, a lowish and falling forecast P/E and a nice chunk of net cash. Note that forecasts can and do go wrong at times, they are not by any means written in stone though we have little else to go on.

Hit by bad debts

The shares fell heavily last year with the background bear market but were especially trashed towards the end of 2008 by news of substantial bad debts. The company states that this arose "primarily from client positions in RBS and the main equity indices." People betting the wrong way on these and then unable to pay, as if to underline my view that betting is for mugs. This unsettled the shares and they fell to a twelve month low of 166p. They've since recovered a bit but I think they have further to go.

Credit control has since been tightened and the most recent directorspeak published in March in respect of the three months to 28/02/09 stated that "… the continuing strong account openings, together with the ongoing development of the Group's offering, leave the Group competitively positioned for further growth."

A trading update for the year ended 31 May 2009 will be published on 9 June, only a few days away, so it might be worth waiting until then before making any decisions if you are interested in the shares. The actual results should be out some time in July.

A minor negative point is that a number of people fancy the shares. Analyst comment is largely positive and I see that commentators on the Fool and elsewhere have expressed favourable opinion. I get a little uncomfortable when I see too many people liking something, it rubs my contrarianism up the wrong way. Sometimes though the majority are right and in any event in this case the support is not massive.

As always with value, patience and perseverance are required because what you expect to happen may not do so for quite a while during which the shares can mark time or fall. And there's always the risk that it won't happen at all.

More from The Motley Fool Value Vault:

• David Kuo and Stephen Bland discuss value investing.
• What is Value?
• Minimise the Downside
• Maximise the Upside
• The Psychology of the Value Investor

Stephen holds shares in IG Group and it is also a current Champion Shares recommendation.