If it's now the turn of value shares to outperform, where can we find real value?
Last week I wrote about the prediction that it's now the turn of value shares to outperform growth shares. If you believe that prediction, then the place to be right now is in 'deep value' shares -- the sort that look like they're offering you pound coins for 50p.
And how to find these elusive bargains? Many years ago, Ben Graham, the 'Father of Value Investing', outlined what to look for in quantitative terms. Shortly before his death in 1976 he refined his ideas into ten criteria for stock selection, but the four most important were:
l earnings yield at least twice the AAA bond yield. At the present time, that equates to a PE of 9.4, but Graham also put an upper limit of 7 on this criterion;
l dividend yield at least two-thirds of the AAA bond yield, so a dividend yield greater than 3.54%;
l share price less than two-thirds net current asset value; and
l total debt less than tangible book value.
In searching for companies that cleared these hurdles, none of the my share screening facilities gave me exactly what I wanted, but ADVFN came closest (with a little ingenuity). I also restricted the results to companies with a market capitalisation of at least £100m, as Graham had a preference for larger companies.
The results are listed below:
Company | Sector | Price
(p) | Market
cap. (£m) |
|---|
Ladbrokes (LSE: LAD) | Travel & Leisure | 219.50 | 1346 |
Rentokil Initl. (LSE: RTO) | Support Services | 71.75 | 1302 |
Persimmon (LSE: PSN) | Household Goods | 348.75 | 1092 |
Signet Grp. (LSE: SIG) | General Retailers | 59.50 | 1006 |
William Hill (LSE: WMH) | Travel & Leisure | 273.50 | 987 |
Bellway (LSE: BWY) | Household Goods | 594.00 | 715 |
Barratt Devel. (LSE: BDEV) | Household Goods | 132.50 | 481 |
Debenhams (LSE: DEB) | General Retailers | 48.00 | 429 |
Johnston Press (LSE: JPR) | Media | 47.50 | 313 |
Smiths News (LSE: NWS) | Support Services | 80.00 | 150 |
Mucklow (A&J) | Real Estate | 221.00 | 138 |
Mountview Est. (LSE: MKLW) | Real Estate | 3400.00 | 133 |
Aga Rangemaster
(LSE: AGA) | Household Goods | 180.25 | 127 |
Boot(H)
(LSE: BHY) | Construction & Materials | 91.50 | 120 |
Graham regarded this method as suitable for selecting a portfolio, rather than just one or two individual companies. That's similar to Templeton's original success in picking a portfolio of unloved shares -- one might expect a few of these to crash and burn but the overall portfolio would still outperform.
One problem is that much of the time there are only a handful of companies making the cut -- finding fourteen of them is unusual.
A bigger problem, in my opinion, is the number of builders on the list, classified in the 'household goods' sector. While Graham focused on tangible assets rather than woolly goodwill valuations, it is currently bricks, mortar and land that are overvalued. Looking at these, and profits, and dividends, in the rear-view mirror is of questionable value.
This list may be a reasonable starting point in the search for deep value, but I'd need to be more satisfied that the valuations supporting the list would stand up to scrutiny.
