VALUE INVESTING
No Deep Value In The Bear Market

By Stephen Bland (TMFPyad)
April 11, 2003

One rather unexpected effect of the bear market has been the dearth of deep value shares. Normally they come on to me like fresh horse manure to a fly and I am prepared to stick my wad into those that satisfy my pyad criteria. In theory you might expect that more and more of these would reveal themselves as the market fell. But it was not to be. I haven't seen a decent pyad share of sufficient market value in a very long time.

There's plenty of non pyad value though. For a start there are all those high yielding blue chips, some of which I wrote about last week. A terrific time for yield players. Grab it while it lasts.

But of the real thing, the in-your-face gagging for it pyad share, there is not a sign (not with a market value of over £100m anyway). Where have they gone? Where are all those shares with voluptuous vital financial statistics, posing provocatively with their big balance sheets on display? I dunno.

A trawl using pyad criteria as the initial filter showed the three largest companies to be Henry Boot (LSE: BHY), Hardys & Hansons (LSE: HDYS) and Low & Bonar (LSE: LWB). None of these exceed £100m, the largest being Boot at about £73m. I would be prepared to go below my usual minimum cap where the company looked exceedingly attractive but none of these do as a single investment and I prefer to hold only one, maybe two, shares.

Larger portfolios make me nervous but for portfolio players, which value investors should be, these might be interesting. Incidentally nobody should follow what I do and own only one or two shares. Barmy but there you go. I never claimed to be playing with the same deck as anyone else, nor even with a full one. One share is usually more than enough for me and cash is often the share of choice, although I'm not in cash at the moment.

Boot seems to have raised a some of £50m of cash, which is good, by selling its housebuilding business. Low has done the opposite and blown its cash on some acquisition, which is bad. I'm not sure what Boot's plans are for the cash, so investors should find out if they wish to take it further. Regarding Low, I see acquisitions as the enemy of value. I would consider selling a value share in which I was invested if it started blowing too much of my money on some potentially duff investment. And it would put me off taking a new position in such a company. Too risky.

Hardys, a brewer, is a perpetual value share. It has been a decent investment in this bear market in true value style. It has been coming up in my trawls since before dinosaurs roamed the earth. It is unlikely to set the world alight but is a good addition to a value portfolio. It also has its place in a high yield eternity portfolio, if you don't mind small caps. Small caps don't come much better than Hardys for this purpose. To the extent that I ever get emotional about a share, I like Hardys. That's probably because it has been around for so long in my searches. It's like a faithful old hound, not a dog note, although I have never owned them.

Going back to the acquisitions point, the reason that I dislike my investments making acquisitions is that I have no faith in the directors making a success of them. I want to put as little of my trust in lousy humans and as much in assets as possible. I am not interested in buying management as some investment commentators advocate. That is the last thing into which I would put money. It's a completely anti-value approach and thus more likely to fail in my opinion. The small investor has no way of knowing what is good management. Perhaps the most famous example in recent years of this is Marks & Spencer (LSE: MKS). Before its fall it was always regarded as possessing amongst the very best managements in the land. This was reflected in an extremely high and non value rating on all the usual fundamentals.

Talking of M&S, I became tempted as its share price collapsed and approached book value. It almost becoming an asylum seeker in value territory but, if I recall correctly, it never quite got below it in order to qualify for citizenship. It was a mere opportunist economic migrant rather than a true fiscal refugee, so I never went in.

So fallible people don't represent value to me at all. Things like cash and property assets do. In fact value shares often become value shares because poor management causes the company to suffer for a time until either it is bid for or someone turns it round.