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VALUE INVESTING
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Corus Group (LSE: CS.) is the result of a merger between British Steel and a Dutch steel company. Now here is a bombed-out share if ever there was one. The company is notorious for me because in its former British Steel guise a few years ago, it came into my sights as a full deep value share. A pyad share. I have told the story before but it may bear repeating to demonstrate how value shares can occasionally go wrong. At the time it fitted all my criteria perfectly, a textbook classic. Then, as now, we had a strong pound and it was being suggested by brokers and press that although the current year's earnings per share (EPS) was going to show a powerful rise, just what I seek, the following year would be hit by the strength of sterling given that the company was highly dependent on exports. But I decided to bet against that consensus view, a position in which I often find myself, but that is my game. This consensus fear was holding the share price down to what I saw as ridiculously low levels. To qualify for my criteria means it must really have been cheap. So I went in big. For a time nothing much happened, or there was a small fall if I recall. But the fundamentals, as I saw them, were unchanged. Then in came the results and the company duly delivered. Big rise in EPS, fat dividend, the works. It continued to be a pyad share, commentators continued to say it was not attractive and I was convinced they had all got it wrong. I would have bought more if I was not totally invested in the share anyway. In the event, the strength of the pound did indeed hit the following year's profits and the chairman said as much in his statement. Directors' comments are important to me, and once the company itself had warned, I immediately got out at a loss of some 25%, the value fundamentals having evaporated sufficiently to dictate a sell. The shares continued to fall, but I never looked back, that is not what I am about. It was my biggest loss for years and it hurt. But I had to analyse why I went wrong. That was the important feature to me. I reviewed the play carefully, step by step from the initial location in the Investors Chronicle, to the disregarding of the negative comment. I could find nothing that I would not have repeated every time. Even the IC stated that it should not be bought, if I recall correctly, and as my fellow value players will be aware that is frequently quite a powerful buy signal. Having concluded that as far as my strategy went I had done nothing wrong, the only explanation is the one which says: you can't win 'em all. So, value players will need to remember this. Occasionally, very occasionally it goes wrong. When that happens it is absolutely vital to get out instantly. Do not dither, do not hope it recovers, trash it. Here are the fundamentals on Corus: A mixture of the highly attractive and the highly repugnant; the latter being the loss recorded last year and lack of dividend, the former being the very low Price/Book, net cash and potentially low P/E and high yield. As in the time when I lost money on the share, the strong pound is being blamed for everything from falling profits to the weather. What would British management use if that convenient scapegoat was not around? Has anyone noticed that when the pound is weak the management take credit for a good performance. When it is strong, then it is not their fault if profits dive. The truth is that anyone with the audacity to call themselves a manager or a director, or even a managing director, always has to accept responsibility. But few will, of course, if you read a lot of company reports like I have. If profits fall, then they should say, "We blew it, guys." The question for potential investors in Corus is whether the fall has been overdone. A clue may be found in this recent comment from the chairman talking about the merged group in June: "...significant potential in its business and downstream activities. Inevitably to exploit this potential will mean more new challenges and changes ahead, in order to deliver the value that shareholders require." Interesting language, directorspeak, bearing only a superficial resemblance to English. Value players, in addition to learning to read annual reports, must also learn this strange tongue. I am not sure whether those that speak it naturally, directors, are actually born with the gift or merely acquire it upon promotion to the board. Did they always talk like that, even in school? What he means is that there is going to be a poor period after which he hopes for a recovery. "Challenges and changes" in directorspeak means little or no profit. Despite its low valuation, Corus represents a high risk play, in my view. Not high risk in the sense that it might go broke or fall a huge amount more, I mean high risk in the sense that it may go nowhere seriously for some time. Value investors look for a substantial turnround. We are not interested in modest rises, they are not adequate enough to compensate for our risks. The current year earnings per share (EPS) forecast is very low. The following year is good, but that is more chancy. Additionally there is a massive range in the brokers' forecast figures, reflecting the difficulty of forecasting this industry. I don't know about the short-term outlook for the steel industry. As far as smell goes, it is something that is highly cyclical, and is an indicator of the world economy in general because of the ubiquity of steel in so many products from cars to construction. But competition is very tough. With such cyclical shares the time to play them is as near to the bottom of the cycle as you can. You can't call the exact bottom, of course, other than by luck, so any buyer has to have the stomach for possible further falls. But Corus is somewhere around its low point in my view. The future direction is more likely to be up than down, as I see it. But to risk this you need to be satisfied that there is sufficient upward potential to make the play. By sufficient I mean, say, 50% within twelve months. It is possible. If I was a portfolio value player I would probably risk part of my money on this.
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