More proof positive that a value strategy is a winning one.
Last May, I couldn't understand why Delta (LSE: DLTA) seemed disproportionately cheap compared to the rest of the market and its peers. Even then many of us shareholders had enjoyed the rise from an absolute low of sub 70p the previous December to 117.5p at the time.
On Thursday, those still holding the shares got a very pleasant surprise when it was announced that American company Valmont Industries Inc. knew a bargain when they saw one and had snapped up the steel products group for 185p a share; a 60% premium to last May's price including dividends paid.
So what?
"So what?" you may, understandably, be thinking. Many individual companies have seen their share prices rise by that kind of percentage and a lot more in many cases, over the same period. The difference for me is that Delta was an out and out value share. Although the generally in-line news since May was, of course, helpful for the share price, the downside was largely protected by its asset base. In other words, the approach that starts with a reluctance to lose one's money, as opposed to seeking big and quick returns, bore fruit.
In May, Delta had a net asset value of £267.5m, £120m in cash, was making around £40m a year in pre-tax profits despite the difficult economic backdrop, but was valued at a little over £180m. Putting to one side the pension situation for the moment, Delta's huge cash pile relative to its size puts the shares on a prospective P/E ratio of just 2.7 against enterprise value.
Thursday's recommended takeover values the company at £284.5m which is a bit more like it. Even this looks like a bargain (despite the offer price being over 20% above Wednesday's closing price) and there's always the possibility of another suitor emerging before the deal is done and dusted. The market seems to think so, as the shares trade at a premium to the offer price at the time of writing. But at anything less than 150p or so, the shares were an absolute steal for the value-orientated bargain hunters amongst us.
One swallow doesn't make a summer
OK, one swallow doesn't make a summer. You can't exactly prove that value investing works based on Delta alone. Thankfully, I don't have to. There's plenty proof out there from the Benjamin Grahams and Warren Buffetts of this world that value investing works. This time last year, you could have been forgiven for thinking that value investing had had its day, but history has shown us that patience is key; underperformance is generally precursor to strong outperformance. When value stocks are cheaper, they generally are cheaper and the case is simply stronger.
The data collected in What Has Worked in Investing (Tweedy, Browne - PDF) show that companies exhibiting the following characteristics generally outperform the market:
- low price in relation to asset value;
- low price in relation to earnings;
- a significant pattern of purchases by one or more insiders;
- a significant decline in a stock's price; and
- small market capitalisation.
Delta met all these requirements.
The report presents a barrage of evidence to confirm the success of this approach. It isn't rocket science and it isn't exciting enough for many investors looking for the next big thing. But it's plenty racy enough for most Foolish investors.
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