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VALUE INVESTING
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Another analysis in my current series of non-pyad shares that nevertheless have certain value attractions. I tend in my own investments to stick to deep value shares that satisfy my personal criteria, with the occasional foray into crisis or other value shares that catch my attention as a side bet with a small proportion of my money. However, this series is about value shares in general because there are many shades of the strategy, and readers may be interested in those that do not pass all my filters yet may appeal to many value investors. Laing (LSE: LNGO) is a well-known construction company, involved in housebuilding plus other property development and civil engineering projects. This is its profile: Almost a pyad share then, except for the fact that it is trading at a little over book value. Since a slump in earnings per share occurred in 1996, falling to 6.5p, the company has shown very good growth going from there to 11.7p in 1997 followed by 12.5p in 1998 and 27.1p for 1999. The 2000 forecast is showing a further 53% growth on that figure to 41.5p. 2001 is up again to 47.8 but beware longer term forecasts, they are not reliable. No forecasts are reliable but two years out is even less so. Moreover, this rapid increase in EPS has been achieved on a fairly static turnover, indicating sound management, probably by being more selective on the construction projects accepted. Construction is a notoriously difficult and cyclical industry because of the long-term nature of the work and the consequent high risks of things going wrong. Margins can sometimes be low where companies have to bid competitively to win work and may be tempted to lower their margins where it is a case of doing that or having little work at all. The clever operators manage to avoid this situation and simply will not take on work below a certain profitability level even if it means losing the job. But despite that, the work can sometimes go wrong because of time and cost overruns. There may be penalty clauses for not completing the contract on time, there may be a skilled labour shortage causing rates to rise, there can be all sorts of other problems such as environmental opposition part way through a job and so on. A high-risk industry. But that does not really explain Laing's current very low rating given what appears to be a powerful growth outlook making for a low current and forecast P/E, lack of debt, good yield, P/BV on the very low side, strongly negative one year relative strength and all the other features that usually mark out a classic value play. The high risks of construction would appear to factored into the price with a very substantial margin of safety at current levels of the fundamentals. So what is going on here? Is this the next big one into which to sink all your worldly goods, "bet the farm" in the now clichéd phrase, or is it too good to be true? A difficult call. Laing is not out of step with its fellow general construction and housebuilding shares. They are nearly all on varying value-type ratings on their fundamentals, not on growth ratings. So you could say the whole sector is at attractive value levels at present. Readers on the value board mention construction shares often as they notice the low ratings of these shares. Any trawl across the market on low P/E and other value filters will catch a number of these stocks. Laing seems to be one of the more attractive ones in my view but is suffering from the contempt the market is granting to the sector right now, and has done for some time. The only reason why the market would do this to a whole sector that appears to have good growth prospects is that it does not believe this will materialise, or if it does it will be very temporary. Put simply, these shares are being rated as though they are heading for a fall, despite the one- and two- year rising EPS forecasts. That would happen in a recession, construction and housebuilding together with banking being amongst the first industries to suffer in such circumstances. I have made most of my money in the past by betting against the market on a particular share. I am totally of the opinion that provided you find the right shares with all the attributes about which I have written extensively, then the majority is nearly always wrong. But, very occasionally, they are right and I have lost when this has happened. It is rare. I made a little money a while back in the current construction boom. I wrote about two particular shares at the time, both housebuilders. What concerns me is that because this industry is very cyclical, and we are still in the same cycle, we must be much nearer to the top then when I was very enthusiastic about such shares. A lot of commentators are saying the sector looks cheap. A negative view to me. That may sound daft but here's why. The people I have read who are making these comments are not in the main contrarians. They are mainstream investors, unlikely to risk their own money in contrarian or value plays. It is not a majority thing, otherwise the sector would not be so low rated, but there is enough of this around to make my nose itch. I am not certain that in construction in general, and Laing in particular, that one can have two bites of the cherry, two good investment plays in the same cycle. The market does not trust these shares. Normally an attraction for the likes of me, of course. But this may just be one of those occasions when the market is right. Laing looks good, but...
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