Stephen Bland sieves for value in the blue chip index.
I haven't done one of my index trawls for a while. For those unfamiliar, it's a simple process I devised centuries ago for locating potential value plays by a series of three mechanical filters, P/E, yield and P/B, in order to produce a short list for further investigation.
I have used it in the past on the FTSE100, the 250 and the smaller share indices. 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 potential value.
Another feature sometimes revealed by this exercise is which sectors that are currently out of favour, as shown by multiple appearances of several companies in that sector.
Remember, less is more
Further research into the shares that my approach locates is required, though not too much, you don't want to overanalyse. As always with my value style, a light touch is all that is needed to make decisions, less is more.
If you find yourself spending more than a few minutes on a value decision you may be getting in too close. What can happen is that if you spend a lot of time researching a share, subconsciously you may be inclined to invest in it for emotional reasons rather than the pure numbers, because you don't want to feel that all that time was wasted.
Here are the FTSE 100 results. Note that the yields and P/Es are forecasts whilst the price to book figures (P/B) are last full year actual. Book in the P/B calculation refers to net assets, not net tangible assets, because that is the way the database I used is shown. Value players though may be more interested in net tangibles which is something they will have to work out themselves.
Also, do note that there are often errors in databases, some of which I have corrected where I was aware, but there may well be others.
Top Ten Yields
Ten Lowest P/E
| Company | Price
(pence) | Forecast
P/E |
|---|
| Aviva | 418 | 6.5 |
| BP (LSE: BP) | 508 | 7.2 |
| AstraZeneca | 3,040 | 7.4 |
| Old Mutual (LSE: OML) | 126 | 7.5 |
| Legal & General (LSE: LGEN) | 105 | 7.8 |
| Barclays (LSE: BARC) | 285 | 7.9 |
| BAE | 349 | 7.9 |
| Resolution | 242 | 8.4 |
| RSA | 131 | 8.8 |
| BT (LSE: BT-A) | 188 | 9.4 |
Ten Lowest P/B
| Company | Price
(pence) | P/B |
|---|
| Royal Bank of Scotland (LSE: RBS) | 41 | 0.25 |
| Schroders (LSE: SDRC) | 1,498 | 0.54 |
| Barclays | 285 | 0.59 |
| Old Mutual | 126 | 0.63 |
| Shell | 2,139 | 0.65 |
| Aviva | 418 | 0.77 |
| Resolution | 242 | 0.79 |
| Investec (LSE: INVP) | 536 | 0.88 |
| Vedanta (LSE: VED) | 2,525 | 0.89 |
| Land Securities (LSE: LAND) | 682 | 0.92 |
An interesting set of results with several conclusions.
First search is for the big one, the triple, and we have two hits here, Aviva and Resolution which are both insurers. These therefore may reward a little further research. Regular followers of my articles will know that I have a passing fancy for Aviva as a value play. Its three table rating, despite the recent price rise, does nothing but encourage my view on it as a continuing value share.
Then there are several shares which make two of the lists. AstraZeneca scores on yield and P/E as does BAE Systems. Barclays and Old Mutual make the P/E and P/B tables whilst Shell is in the yield and P/B entries. These too may be worth a scroot.
The sector in the doghouse
Apart from the merits of individual shares, it is clear that one sector dominates the tables, insurers. Four of the yields are in that sector, five of the P/Es and three of the P/Bs. That is quite spectacular and a very decisive indication of how the market views the sector at present. It follows that the sector may well be fertile ground for value investors.
Why should that be though? I dunno and anyway I'm not a reason artist, obsessed with always needing to explain why shares do what they do because sometimes there is no sensible economic reason. In those cases it can be human irrationality. It is this irrationality which permits value shares to exist or whole sectors to be valued as if they are nearly bust.
Contrary to certain opinion, there is such a thing as a free lunch, the market does not automatically arb out all anomalies instantly, though in the end it probably does. But that allows plenty time for value players to make something out of it.
Traditional value goes AWOL
Another interesting feature here is in those sectors which are conspicuous by their absence. For example, you could well expect the low P/Bs to feature a fair sprinkling of property companies because traditionally these trade at a discount to assets. But now there is only one, Land Secs., and the table is dominated instead by financials, like insurers and banks.
Similarly, you might expect the high yielders to contain a lot of utilities because those shares are often considered to be good principally for income and not growth. We still have two in there, National Grid and S&S Energy, but that is fewer than one might expect, with no waters for example. The insurers have blown them out, an indication of how lowly the latter are regarded at present if many of them yield more than some utilities.
Insurers then are the most obvious value message here but there are several others that may repay some investigation too.
More from Stephen Bland:
> Of the shares shown, Stephen owns Aviva, BAE Systems, BP, BT, Land Secs., National Grid, S&S Energy.
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