VALUE INVESTING
Anatomy Class Three – The Fairview Story

By Stephen Bland (TMFPyad)
September 24, 1999

I closed last week with the story around March 1999, having liquidated Barratt and API and therefore being fully in cash. The hunt was on for the next play and it arrived almost immediately. My gut, always reliable, told me that whatever it was I was going to put the lot on it – bet the farm, in the now trite phrase. Remember I was 54% up in some six months overall. Therefore whatever it was it would be big.

I suffered the familiar mixture of excitement at finding a new play and the risk it entailed, with the tinge of regret at pulling what was a substantial amount of money out of its safe hiding place at the bank when this is what came along, courtesy (as so often) of the Investors Chronicle, in their issue of 5 March 1999.

Fairview (LSE: FRV)

• P/E 7 historically, 5 on forecast
• Yield 3.0%
• Assets – P/BV 0.8
• Debt – net cash £36m
• Capitalisation at a price of 93p per share £170m
• Strongly rising eps forecast
• 12 month high/low 103/76 so it was towards the upper end

The company had only been floated for a few months. It was a spin off from Hillsdown. The shares had fallen then recovered to some extent. The yield was on the low side but this appeared to be the case only because it had hardly any dividend history. The likelihood was of a strong rise in the dividend if the forecast eps rise was met.

Fairview is a housebuilder, specialising in the lower end of the market in the London area. Interesting, because I had just come out of Barratt (LSE: BDEV), also a housebuilder, very successfully. Housebuilding shares had all been highly undervalued over the previous year or so but few demonstrated the ultra low value that I seek. The sector was ripe for value players of all shades, including me. However I am not a sector player and was led into Barratt and subsequently Fairview merely by the fact that they were pyad plays, not because they were in the housebuilding sector.

Fairview had all the features I seek. It was the quintessential pyad share.

I did my usual trick, took a step back and inhaled very deeply. It smelled real good. Like whatever your favourite perfume is, the one that turns you on. Housebuilding was still in the boom period, I knew that, and consequently the rating was quite ridiculously low for a company with the fundamentals and prospects of Fairview. The shares had "buy me" written all over them. Regretting it immediately, I mentioned the company on the value board indicating that I was looking for a 50% gain to see what other readers thought. Maybe someone knew something I didn't that would prevent me making a big, big mistake. Nobody raised any objections.

I got on the phone to my broker and stuck the lot on it, getting in at a little below 100. I have to admit to being a little nervous because of the size of the folding stuff I invested in this company. I have felt this way many times, because despite my obsession with minimising the downside, the share can of course still go wrong. Minimising is not eliminating. You can't eliminate risk entirely if you want to buy shares at all. But the nerves are all part of the fun of course. If I didn't want that I'd leave my money in the bank.

The bull run started very quickly, no doubt assisted by an article in a later issue of the Investors Chronicle rating the share a buy. A reader posted a message that Merrill Lynch had tipped the shares. Other readers posted messages about directors' buying. All this was great stuff, coming as it did after I had gone in and thus boosting the price.

To be honest, all the positive noises like these made me a little wary. Contrarian thinking leads one to start wondering whether, if too many bullish sounds are heard from brokers etc., that there isn't something amiss with the share. I remember putting up a message somewhere to the effect that a broker recommending a share in which I was invested was like someone trying to move in on your girlfriend. You've found something beautiful and in a strange, jealous, possessive way you don't want anyone else to share it. And yet you do of course because such sharing helps to drive up the price. I say "you" but I am referring only to me really – I doubt others get these peculiar feelings.

The Fool even started a company board for Fairview, not on my request I might add. I don't know who the culprit was. The same had happened for Barratt six months before, after I had mentioned it as a value share, although in that case I discovered the identity of the perpetrator; a well-known TMF no less.

Anyway, Fairview went up a lot in the first few weeks, then levelled off followed by quite a long period of fluctuation. After the initial rise I was as usual tempted to sell. And yet I believed the share was still heavily undervalued even by my tight criteria. One or two readers asked if I was still in. I was. I had set a target of around 150 for my exit price, subject to review in the light of events. I don't usually set targets but that was the first base, the price at which the deep value would no longer exist by my standards unless the company was so super-profitable that it still represented pyad value even after a rise of 50%.

The results were due out in early September 1999, or so I thought from indications on information sites. I was caught unawares when they published their interim figures in August. The price by now had reached my target. A quick look at the interims suggested that it was time to head for the exit. Cash had gone, invested in the land bank. P/BV was now over 1, but that is always the first feature to go. P/E was still low and the yield was now decent, especially on my buying price of 98. I was correct in my original belief that the lowish initial yield would turn out to be much better in the event. But on balance the share now represented greater risk, the kind I am happy to leave for the next guy. I went cash, and got out with a gain of some 50% in about five months or so.

The results over the last year are not too bad. I was 54% before going into Fairview. By investing all the proceeds from the Barratt and API deals I had increased the money by a further 50% on selling Fairview. The outcome was that I was now around 131% up in the period of just under a year since going into Barratt in September 1998. These represented all my deals in that time. I had made no losses.

I have been doing this for many years. I have mentioned only my closed deals over the last year because I no longer have the records of why I bought earlier trades. In particular I would have liked to portray the anatomy of a major five-figure loser for me not too long ago, British Steel (LSE: BS.). But I no longer have the source data that persuaded me to buy it. Nobody should get too carried away into believing that pyad shares always win. They don't. But they do so enough to make up handsomely for the odd loss.

The beauty of all this is that the profits can be made in superficially unattractive industries such as housebuilding and packaging. Previous value shares have been in areas such as shipbuilding and copier renting. I don't deliberately seek out shares for their dullness. They find me. I have yet to be offered pyad shares by the market in biotech, IT, Internet stuff and the like. The process keeps me away from the latest investment fashion. There is an inverse relationship as far as I am concerned between making money and the exciting nature of the share.

And yes the deep value is so deep that I probably miss out on a few winners too. But it doesn't matter. As I've written, my belief is that the first step to successful investment is learning how to minimise losses.

Next week, anatomy classes over for the time being. Some accountancy lessons.

Comments and questions to the Value Shares board, please.