Stephen Bland reviews all closed trades outside of his value portfolio.
In May I reviewed the value share Fiberweb (LSE: FWEB). At the time, the offer price was 58.25p. I'm now calling a sell on this share at a bid price of 69p. If I assume £5,000 invested then it would realise £5,866 after including all costs -- that's 17% in three months or so, which isn't bad.
My reason is that the principal value leg, the price-to-book (P/TB) ratio, is more or less blown now. In my original article I noted that net tangible assets were £133.6m, but that was based on the last balance sheet being 31 December 2011. At the time of my article the cap was £101m, making a P/TB of 0.76.
Since then, the company has released half-year figures to 30 June 2012 that show net tangibles had fallen to £126.6m at that date. In addition the market cap has risen with the share price and now stands at about £121m. Consequently, with this squeeze at both ends of the ratio, P/TB is now 0.96 and thus being almost 1, has been more or less outed. Exactly what is sought by the value investor.
Money makes the world go round
It's not all bad because the second most important value aspect of a small cap like this is net cash. In my earlier article I noted that this amounted to £22m. At 30 June it still had some of this marvellous stuff, but it had been reduced to about £8m. So it continues to possess this value leg. It gets better because more recently in a press release on 6 August, it announced the receipt of £16m, the final payment on a major disposal they made last year. Thus assuming they still have the £8m, their net cash position is now £24m.
Earnings per share forecasts have been upped a little since I first looked at Fiberweb, with the 2012 figure now expected at 5.63p and 6.67p seen for 2013. Beware, though, as small caps like this have only a very few analysts bothering with it so the forecasts will be even less reliable than usual. Anyway, for what it's worth, this makes price-to-earnings ratios (P/Es) of 12.2 and 10.3 at my exit price. Those aren't value levels really, and I made a similar observation previously. It never was a P/E play but my view on this ratio is that, particularly with small caps, it is of lesser importance than assets and net cash.
The current dividend forecast for 2012 has also been raised slightly and is now 3p, with the same again expected for 2013. That gives a forward yield of 4.3%, which -- although a couple of clicks below a strong value level -- is not unhealthily low.
I'd like now to review all the closed trades I have featured here since the Fool disinterred me back in 2009. This isn't the value portfolio, this is about those shares that I have written up but not put in the VP, and for which I've called a sell. There are 10 others still in play, and in total those are at about break-even at present. Current standings range from a 39% gain on Avocet Mining (LSE: AVM) to a coincidentally 39% fall on Shaft Sinkers (LSE: SHFT). On Shaft I wrote further on it after my original article and at a much lower price upon which a profit would be shown now for anyone going in then, but in order to be as conservative as possible I am using only the price in my first article.
I'm assuming £5,000 invested in each including all costs to buy and sell, plus I'm using actual bid and offer prices and thus spreads to make this realistic. I have ignored all dividends, primarily because I'm too indolent to look them all up, and because value investing is all about scoring gains with dividends just as a sweetener. If there were any, then this would have added a bit to the return.
|Share||Date bought||Cost (£)||Date sold||Proceeds (£)||Profit (loss)|
|Galliford (LSE: GFRD)||03/02/11||5,000||15/09/11||6,728||1,728|
|Tanfield (LSE: TAN)||10/02/11||5,000||07/03/11||7,175||2,175|
|Redhall (LSE: RHL)||07/04/11||5,000||02/06/11||4,066||(934)|
|Rio Tinto (LSE: RIO)||01/12/11||5,000||10/02/12||5,647||647|
|Total|| || || || ||4,482|
I haven't checked, but if any of these now stands at a much higher price, then that's just tough on me. Similarly, if any are now much lower, I'm not bragging. Generally, a value investor will sell too soon by the standards of many other people. The idea is to buy at value and sell when insufficient value remains -- in other words, it has been outed. The exact definition of how much value has to be outed to call a sell will vary from one value player to another, and from one share to another for the same investor, but that is the general idea. With the above Fiverweb, for instance, some may judge that although P/TB has outed, the net cash continues to make the share desirable.
In considering this, note that the purchase and sale prices do not matter. The key fact when considering a sale is not whether you are making a profit or loss but whether sufficient value has evaporated in your view to render the share dumpworthy. If it has, then you sell regardless of your profit or loss on the trade. Sometimes you'll make a loss, no trading strategy can avoid that, but if you follow the approach correctly and with the requisite corpse-like patience, I'm convinced that you'll find on balance that worthwhile profits will be made over time. Value will out.
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> Stephen does not own any of the shares mentioned in this article.