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VALUE INVESTING
By
Another small cap pyad share this week: MS International (LSE: MSI). Here are the fundamentals: The latest directorspeak is quite old, dating from November 2000 at the interim results. It isn't bad, though perhaps a little cryptic. Here is a quote: "Opportunities exist for the group and we are in a relatively strong position to capitalise on a number of them." As with many small caps there is only one broker making forecasts and that is the house firm; one of the problems associated with very small companies. However the forecasts shown in my table above are fairly recent, having been made in May, which clearly is much better than having to use very old figures. Again, this sometimes occurs with small caps because forecasts are not updated, often through lack of investor interest. The shares in MSI don't move very much and the beta is quoted as 0.3. This measures the degree of movement in a share price relative to the market. 0.3 means that whatever happened to the market over the period measured in the past, MSI did only 0.3 times that. It is very sluggish, to put it into plain language. At least it was historically but that can change. Such behaviour can be another problem with small caps and arises also from lack of investor interest. Size apart though, MSI displays the full features of a deep value pyad play, which are intended primarily to minimise the downside before considering the upside potential. The latter derives here, and in most cases, from rising earnings per share. In this case the forecast rises are not spectacular. Finally the business. Its activity is described as the design and manufacture of specialist engineering products and the provision of related services. I have no idea specifically to what they are referring with this description. It is no accident, by the way, that the actual business of the company is the last thing to consider; in my view, almost an irrelevancy. In a way it interferes with the Zen of the play though I doubt whether others have this view. First I concentrate on the figures, meditating for about a nanosecond on whether or not they appeal. This is where the real karma takes place, by which I mean whether in the present life of this share as I see it, the acts of previous lives of successful value shares when I held them have any bearing. Do I recognise in the fundamentals alone, forget the business, the likely destiny of the share as indicated by the past lives of such plays sitting in my mind? As mentioned above and for many other reasons, I draw readers' attention to the substantially increased risk of small cap shares compared with larger caps. Anyone using value with small caps should invest in a wide portfolio to trade off the greater individual share risk. Also I want to stress that the shares in this series are not tips. In almost every case I would not buy them myself, which tells you quite a bit. This is because they do not meet my ultra-conservative criteria. Some will fail, some will do well. Readers must not even think about investing in them simply because I have given them a brief write-up here. What I don't want to prevail is the idea that value is almost infallible. If done right it has a pretty high success rate in my view. However even with my criteria I have the occasional loser. Weaker value criteria will produce more losers. There have been some notable losers in this series, for example. No short-term strategy of any kind can have a 100% hit rate. The test, though, is repetition. Do you come out winning handsomely by doing this over some years, despite the losing plays? If so, your strategy is working.