VALUE INVESTING
Selling Allders, Buying Banks

By Stephen Bland (TMFPyad)
October 18, 2002

Within the last couple of weeks I ditched Allders (LSE: ADS).  This dalliance left me with a dose of the fiscal clap, a painful condition in my most important organ, namely my wallet. A total loss of some 32% after dividends received and my biggest hit for many years. My two reasons for pulling out were the recent bad news in the profit warning and the tremendous value I perceived building up in banks about which I wrote a few weeks ago.

Allders may still go on to do well but I believed that recovery is likely to be far quicker and possibly just as lucrative if not more so over a similar period in banks or insurances than Allders. I could have continued to hold Allders, which had used only a chunk of my funds though a fair sized one, and invest the rest in banks but the latter proved far more attractive to me, sufficiently so to the extent that I decided to drop the poorly performing store chain.

I have never shirked taking a loss if I see good reason to take it, not being one to hang on for a recovery just for the sake of it. There has to be very good value reason to do so though, as distinct from mere market noise, and the profits warning was not just noise. Allders still has a lot of value characteristics, particularly the large discount to book, much of the assets being freehold properties. But the real outer that I like to seek with pyad shares, namely rapidly increasing earnings per share, had been knocked on the head, at least for 2002 anyway. This had to throw 2003 into contention as well. Thus the P/E was no longer very attractive against the market and the yield was not that great. Many banks and insurers were offering the same or more after recent severe falls. Also the net cash may no longer be there, the company having slipped into small net debt position at the last accounts. But what finally tipped the balance was the attractions of other shares.

You can't win 'em all and I never look back. Allders is now history.

On the value board recently and in my articles I stated that financials like banks and insurance companies now represent a great opportunity, possibly one of the most attractive value situations for a long time. Consequently I have decided to put my money where my mouth is (though admittedly I have often been accused in the past of talking out from where the sun doesn't shine).

There was a damn good smell around financials in recent weeks and a particular point which attracted my attention was that poorish news from Legal & General (LSE: LGEN) with their third quarter figures did the share price no harm at all. When bad news fails to dent prices any longer, that is a clear fundamental bear bottom odour signal, as I mentioned on the value board. Though such things can never be sure, share investing being about riding the balance of likelihoods not looking for non–existent certainties.

So I have now gone into banks, though with hindsight I should have made it insurances because many of these have rocketed, the reason I didn't was that I perceived them as possibly riskier, not a problem for portfolio holders but that's not me. Not only with the Allders money but the lot. A farm deal but this time a huge portfolio of two, because these are not pyad shares but two substantial side bets if you like. I'll admit to more than a little nervous apprehension at holding a portfolio this large and diversified.

My selections are Abbey National (LSE: ANL) and Lloyds TSB (LSE: LLOY), the two cheapest banks in the sector on P/E and yield grounds when I bought. As I write these have already risen sufficiently to more than cover my loss on Allders (in pound terms not percentage amount). That's just on paper so it means little at this stage. It could easily have gone the other way I guess. Nothing really matters in the business of trading shares until you have reverted to the greatest share of all - cash - and discover whether you have more than that with which you started, sufficiently more to justify the risks.

Since my banks article, mortgage lender Abbey has become the subject of a weak bid by the Bank of Ireland, using mostly the latter's paper with a small cash sweetener. My investment had little to do with that because I never buy shares on bid hopes, I just felt that Abbey was too cheap on fundamental grounds. Clearly others think so too but the bid has been rejected by Abbey. However this does make the point that value shares are sometimes outed by bids, simply because the same features that attract the value investor can attract bidders, so bid potential comes with value shares for nothing anyway.

Lloyds is a proper bank but has been given much harsher treatment by the market than its rivals, possibly to do with the risks of its major insurance subsidiaries though in fact most of the banks have these. I'm not convinced that Lloyds is inferior to the other big banks, which is what the market is saying, and hence I found it to be given an unfairly low rating and therefore a potential value play.

When the market recovery takes place, and we may already be starting this but I cannot know of course, banks and insurers will almost certainly do better than the background market. In fact this has already been demonstrated in the recent rally. This geared effect may enable good profits to be made but you can never be certain of anything with shares of course. Meanwhile very high yields are around to keep me happy whilst waiting, assuming that the dividends are maintained of course which again is always a risk.

The author owns shares in Abbey National & Lloyds TSB.