VALUE INVESTING
Ten More Value Shares

By Stephen Bland (TMFPyad)
February 1, 2002

A few weeks ago I showed a mechanically selected group of pyad shares, being the top ten caps in decreasing order that satisfied my criteria. I thought it might be of interest to follow this up with the ten smallest caps that satisfy the same criteria since I know that many value investors here, unlike me, are interested in small caps, even micro caps.

The filters used are as follows:

P/E < 12
Yield > 4.2%
P/TBV <1 but > 0
Debt, net < 0

The list is in decreasing order of market cap:

Pathfinder Properties (LSE: PFP)
I-Spire (LSE: IS.)
Conister Trust (LSE: CTU)
Wealth Management Software ( LSE: WMS)
Armitage Bros (LSE: ATG)
North Midland Construction (LSE: NMD)
The Wensum Company (LSE: WNS)
HC Slingsby( LSE: SLNG)
Holders Technology (LSE: HDT)
Bilston & Battersea Enamels (LSE: BTN)

The caps range from about £9m for Pathfinder down to around £1m for B&B Enamels. All micros then really. I have not investigated most of these companies and consequently am making no comment about them as to their worth as potential value plays. Readers must do their own research if they are interested in looking further.

Note that as previously, these selections use only the latest annual accounts for balance sheet information on debt and book value. Consequently this may be well out of date where interims have been published subsequently. Check for this and news announcements for more up to date figures. Ideally get hold of the latest accounts, annual and subsequent interim if published, and study them.

I know that some of these companies have run into losses so that historical P/E ratios will not be relevant and yields questionable. Many may not have any forecasts. In fact a lot of them are of pretty poor quality altogether, being little more than pure asset plays. And even then asset value might not be all it seems. Look for property and cash or near cash as the most reliable type of asset by far. Pure asset plays though can be a good way to play the value game, though it is not really my style.

Also, do not forget the additional risk that comes with the territory of small caps and even worse with micro caps. We have discussed this on the value board but to reiterate, some of the additional risk arises from lack of institutional or even small investor interest, lack of analysts' forecasts and general lack of much action in the shares in many cases. There are other points too, such as what I believe to be a lower integrity amongst small cap directors. A generalisation of course so that there will be many exceptions to this point.

Some of the shares here have been discussed before on the value board. I brought up Slingsby there recently and a couple of weeks ago mentioned North Midland briefly in one of my articles. One of our regular readers pointed out that this company has run into debt, compared with the net cash used in the filter. A good example of databases in themselves not being a reliable way to invest, though they are good for filtered trawls like I have done here.

Interestingly we have the same eclectic mix of sectors amongst these shares as with the ten largest cap pyads (P/E, Yield, Assets, Debt) from my earlier article, with hardly any two being in the same industry. The pyad filtering approach does give you this, whereas filtering on just one ratio such as low P/E for example will frequently throw up a number of candidates in the same industry that happens to be out of favour. But throw in the additional filters on yield, assets and debt and things change. The possession of such attributes is no longer limited to any particular sector. There may be times when it is, but more often than not if I think back over the very long time I have been doing this you end up with a curious mix of shares. That suits me fine. I am interested primarily in the numbers and general feel of the share with only a passing concern with anything as crude as what it actually does for a living.

I am talking about doing this without a cap limit by the way which is how I used to play it. Once you introduce this (mine these days is a minimum of around £100m though I am not absolutely rigid about it) this does have the effect of disqualifying nearly all the shares. Since I introduced my personal minimum cap limit I am lucky if I find any shares at all that meet the initial filters, let alone which stand up to the crucial further investigation such as rising earnings per share, good directorspeak etc. But you do meet a better class of share that way.