VALUE INVESTING
Top Ten Pyad Shares

By Stephen Bland (TMFPyad)
October 25, 2002

Some readers may be interested in a snapshot of my regular trawls for pyad shares that I publish here occasionally. Here are the most recent results in order of descending market value. This list is derived purely by applying the four filters of the approach, selected mechanically.

Allders (LSE: ADS)

Henry Boot (LSE: BHY)
Hardys & Hansons (LSE: HDYS)
The Malcolm Group (LSE: MAL)
Low & Bonar (LSE: LWB)
Reed Executive (LSE: RDX)
Foresight Technology VCT (LSE: FTV)
Montpellier Group (LSE: MPL)
Amstrad (LSE: AMT)
Gibbs and Dandy (LSE: GDYA)

Note that the P/E and yield data comes from consensus forecasts whilst assets and debt are taken from the last annual accounts with no updating for interims or other news. Anyone wishing to consider these shares must look much further into them, in particular I advocate reading the latest full accounts and interim if one has been issued since, together with a review of all recent published news.

The market values here range from about £80m for the largest, Allders, down to £19m for Gibbs.

Since the last time I published this a few months ago there have been five changes, the newcomers being Boot, Reed, Montpellier, Amstrad and Gibbs. Those falling out are UK Coal (LSE: UKC), Northamber (LSE: NAR), Churchill China (LSE: CHH), James Latham (LTHM) and FW Thorpe (LSE: TFW) for various reasons. Interestingly perhaps Hardys has come up in my trawls since forever. I can hardly remember a time when it didn't show, so much so that "Hardys" was probably the first word I ever uttered, as distinct from the more usual "mama". But then I never was much like other kids, or other adults come to that. It is the perpetual pyad play amongst smaller companies and you wouldn't have done badly by holding it over the last year or two compared with the market.

The missing fifth element of the pyad acronym is rising earnings per share (eps). I should probably have called it pyade but thought better of it because that sounds like some disgusting soft drink and I didn't want to be seen as full of gas. I have identified five of the above as possessing this quality, rising eps that is not gas. They are Boot, Hardys, Malcolm, Montpellier and Gibbs. By rising eps I mean that the current financial year for which results are awaited is forecast by consensus to be more than the latest actual figure. The rises range from an anticipated increase of just 1% by Boot to 42% from Malcolm.

Do bear in mind that forecasts are frequently very unreliable and particularly so with smaller companies where sometimes only one broker is producing figures, and that can be the tame house firm which is even more questionable.

Any mechanical trawl for value shares will contain a lot of rubbish so such an exercise is very much just the first step in seeking likely shares. The potential investor must then go through each one carefully, eliminating those with features considered undesirable. For example the rising eps filter, if that is what you seek, immediately knocks out a lot of these. Other factors might include a minimum market value, the degree of discount to book, the quality of the assets, the industry and various smell factors according to taste, if I can mix metaphors. You will find frequently after such further investigation that no worthwhile shares remain at all.

On first thought it is a strange situation that the bear market has not thrown up a much larger selection of deep value shares than a few years, when the market was much higher. Large companies are also noticeable by their absence. I am somewhat surprised at this myself but I guess the logical explanation is that value shares in general, as measured relative to the market when it was much higher, have not fallen anywhere near as much as the broader market. Consequently this would actually reduce, or at least not increase, the number of value shares. It follows that value shares have held up much better. This the desired downside protection at work, though it cannot work in every individual case of course.