VALUE INVESTING
The Market's Cheapest Smallcaps

By Stephen Bland (TMFPyad)
June 11, 2004

Continuing the series I have been writing in recent weeks on value to be found in the FTSE100 and FTSE250 indexes, I conclude with this third part, being a similar mechanical look at the FTSE Small Cap Index. It is amongst the small caps in the market that most value shares are to be found, particularly those of the pyad kind.

The database I used for book values is based on the last annual accounts with no amendment for interims or news since. P/Es and yields are based on consensus analysts' forecasts where available though bear in mind that with small caps there may often be only one broker reporting. Consequently and because databases can contain errors, readers must look further into any shares in which they may be interested.

As usual, I am seeking appearances in all three lists but there are none. There are two twos though, Jarvis which is both a P/E and a yield member and Goshawk in both the P/E and P/TBV tables.

I find that these analyses of value lurking within indexes frequently reveal many shares in a particular sector which for some reason is being awarded a low rating by the market. This time it is clearly Lloyds insurance brokers with three in the low P/E rankings, being Cox, Goshawk and Chaucer plus Hardy in the yield list. The market is fond of tarring a whole sector with the same brush, even the better quality shares within it, so this can be a rewarding way to locate good value shares.

By examining every company in a bombed out sector, you may find some that appear unreasonably hit by whatever sentiment is causing the whole sector to be so poorly rated. Be careful though, the knocking of the sector may well have some justification behind it. You need to be as sure as you can that your particular selection may escape relatively unscathed so that when the sector recovers, your shares will be rewarded by a greater rise than given to the sector as a whole.

Other points to note include the usual selection of property companies in the low P/TBV list. There are three here, being Tops, Freeport and Marylebone. As most will know, property companies nearly always trade below book and additionally they will nearly always have debt. The value approach with property shares is to start by considering those with the largest discount to book combined with the lowest debt. P/E is not important though a decent yield is useful as always.

Apart from sector groupings, there are usually a varied collection of a few shares being kicked when they're down by the market. Jarvis, in two lists, is quite a well known supplier of various facilities, construction and support services to others. The company seems to come up frequently against substantial problems with the quality of its services, most notoriously with rail maintenance in the past. That sort of risk goes with the territory of a business like this where there is always the potential liability of some work having been performed inadequately.

Other shares from various sectors include Molins, Regent Inns, James Beattie, Ultraframe and Lavendon some of which have suffered from profits warnings.

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