VALUE INVESTING
Reading The IC

By Stephen Bland (TMFPyad)
March 3, 2000

A few thoughts this week on how I go about locating value shares, with particular reference to the Investors Chronicle. For anyone who may not be aware, this is a weekly magazine published on Fridays, part of the FT group.

As I have written before, the IC as always been one of my favourite sources. I am referring to their company results pages where they show detail on companies that have reported half or full year results over the previous few days. They have an extremely useful little table of five years' figures for turnover, pretax profits, EPS and dividend. Above the table are some key facts including the current price, twelve month high/low, historical price to earnings ratio (P/E), yield, assets and debt/cash.

Almost the whole of the initial pyad story resides in the table and header, except an EPS forecast. In the text which accompanies the figures they often mention a forecast, though usually from just one broker rather than a consensus view.

In recent times, many more sources have appeared. In particular, the rather expensive REFS, a publication on CD of all the data on every listed company including directors' comments, all the broker forecasts, a very wide range of ratios, and lots of other useful data. The advantage of REFS is that it enables searches to be made instantly on any of a wide range of features, including all the pyad ones. There are other sources too, many on the net including that of the REFS publisher.

But I still read the IC despite its lack of search power and other failings. It may well be force of habit, because I have been doing this since long before the net or even PCs existed. I don't take much notice of their view though. At the head of each company result they show an opinion such as Good Value, Buy, Sell, Fairly Priced and so on. I more or less ignore that and make up my own mind. But I do read the brief write-up which accompanies the results.

Aeons ago, I started by combing through the FT share listings for low P/E and high yield cases. Armed with that list I would then find further research enabling me to eliminate those unsuitable. Extel cards were available at City libraries. These were a bit like REFS but on paper. They gave summaries from the companies' accounts, enabling debt and net asset figures to be found, together with directors' comments. Always worth reading, particularly between the lines.

Having done all that and narrowed the search down to a very small number of companies, if any still remained at all, I would go to the back numbers of the IC and from their quarterly index look up the latest company results for those which had survived the filters thus far.

This helped with the sense of smell. An additional crumb of comfort, or perhaps the opposite, a red light of some kind. Any shares still left were my value plays. Those into which I was prepared to sink the lot, a rather smaller lot than today but the lot nevertheless.

But I can't get away from my weekly IC fix, despite the emergence of new media supplying the same data and much more. I haven't cancelled my subscription and still look forward to it every Friday, mixed up with all the other daily post that enters my office. Junk mail from the Inland Revenue and clients. Important mail informing that I have been specially selected to receive stock market advice from the Basingstoke Club, whose secrets of how to make serious money in the market will be revealed, but only to me mind, upon payment of a nice wad.

The IC doesn't always arrive on Friday, often Saturday or Monday. But today it did.

The hardest filter of the pyad initial approach through which shares must pass if they are to even start following my path to financial redemption is the "A" bit. Net assets greater than the share price, these days more commonly expressed as a price to book value (P/BV) under 1.

1 is a powerful figure, don't you think? Sometimes referred to as unity. Oneself, one-at-a-time, One Flew Over the Cuckoo's Nest, a singularity. Something which means far more than merely an arithmetical concept. The implication is of wholeness, completeness, nothing missing. To be at one with yourself. To have a P/BV of less than one, implies, following the above ideas, that there is something incomplete, something not quite right, maybe a bit dodgy about a share.

Using the IC as a source then, all you have to do, to cut down the time is to look at the company results figures for what they call "Net asset value" in the table header, and see if this exceeds the share price shown above it. Half the time I don't even look at the company's name or what it is doing. Only if the net assets exceed the share price do I look further. In many weeks there are none. Even in the most prolific weeks there will be only a small number. Those that are, will often be property companies, which nearly always trade below book anyway and to which other considerations must therefore be applied.

If you find a P/BV under 1 then I look at the other features. I still am barely aware of the company's name or what it does at this stage because it does not matter. I need to unemotional at this point. I don't want to smell anything – yet.

Looking for the other three features will in most weeks eliminate all the shares entirely. Pyad shares crop up only very rarely. If any still remain, then I start to become dimly aware of the company, its name, what it does, from the text and my general knowledge of the market. I start to get faintly interested. Check on the market cap, also shown in the IC table header. Needs to be 100m. I may go a bit lower, perhaps 80m-ish for a good case, but I prefer higher, much higher.

Here's one from this week's IC. Wembley (LSE: WMY). It has been mentioned by readers on the value board before. It is the company that used to own Wembley Stadium, which it sold, but still owns the surrounding site. It runs racetracks in the US and has similar deals in the UK. Fundamentally, then, a property and gambling based business.

P/E 14 (historical)
Yield 1.8%
NAV 474p
Price 440p, 12m high/low 440/326

Debt – net cash of 66m
Cap 212m

It has a patchy EPS record, but that is because the business has changed character since running Wembley stadium.

It passes the four pyad criteria except on yield, which is very low, even though the dividend was increased substantially. I am prepared to yield on yield for a good case.

I grew up in Wembley. I know the area very well. My mum still lives there. In fact she used to work at the Stadium on dogtrack nights, taking punters' bets on the Tote.

The IC sees great value in developing the area round the stadium which at present is a very large and extremely ugly conglomeration of car parks, out of town shopping warehouses and industrial units. The IC may be correct but don't forget that if anyone sees the company as primarily a property play, then these normally trade under book. On that basis the smallish discount to book value may be justified, unless it is felt that book understates the value of the land substantially, which possibly is the case.

On the gambling side, that can be attractive. A mature gambling business is unlikely to merit a high P/E but one that is growing, like any other growth business, may justify a higher rating. The EPS forecast in the IC is for 35.8p this year which at a price of 440 gives a P/E of 12. Not dear and well within the pyad limit of 2/3 of the market. However the latest EPS was 31.3 per the IC so the growth is not great, only about 14% on these figures and definitely on the low side.

An interesting play, then. It depends for success on the belief that high profits or seriously increased asset value will ensue from the land development together with good growth from the gambling interests. Planning permission has yet to be granted for the development but knowing the poor state of the area as I do, it is very likely that something will be done with it.

And it also serves as an illustration of how useful the IC can be.

Questions on the value board please.

Related Links

• Value shares discussion board