VALUE INVESTING
Crisis? What Crisis?

By Stephen Bland (TMFPyad)
September 24, 2004

In my Value Investor newsletter I am constructing a high yield portfolio (HYP) for readers by adding one new share in each monthly issue, there being nine shares so far in diversified sectors. The advice is to buy each share at the time of publication because the features which I have decided make it an attractive HYP selection may not be present at a later date. One possible advantage of constructing the portfolio monthly rather than all at once is that it may enable me to take more advantage of shares that are depressed temporarily.

In February this year I selected oil company Shell (LSE: SHEL) for the HYP. The buying price shown in the newsletter's scorecard is 363p and the price as I write is 418p. Additionally, dividends of 15.9p have been declared making a total return of around 19%. I point out that the buying price for all shares in the scorecard is the closing price on the day following publication thus ensuring that this is a realistic figure, unlike many other newsletters.

At the time of my selection, Shell's price was depressed by the well publicised overstatement of its oil reserves. This I believed was a great opportunity for HYPers to pick up one of the safest yields in the market at a good price for the long term. I wrote in the newsletter that I considered the price fall to be overdone due to the bad news.

I have seen this sort of situation many times before and did not believe that the problem would make any real difference to the company's attractions. The immediate yield itself was not that huge, something like 4.4% on the scorecard price, but for Shell this historically is quite a high point. If people wanted an oil in their diversified portfolios, and I certainly did for mine, then this was the time to strike at Shell. And so it worked out.

Shell would not have been a bad crisis play for the same reasons. A crisis play is where a share price is depressed temporarily by an excessive amount following some bad news. Bad news which the investor is convinced has been given too much attention by the market thus pushing down the shares by more than is justified by the events. In other words the crisis is not a crisis at all, just an ephemeral minor nuisance which makes no real difference to the quality of the investment. This is what happened with Shell. I was certain that the reserves question was just a bit of temporary nonsense to which the market, typically, paid far too much attention. I would not have picked it for the HYP otherwise.

Stick to blue chips with this kind of play because they are the ones with the strength to recover from a non-crisis crisis. Also, you must be able to distinguish as far as possible a real problem from the phoney ones that constitute an attractive investment. There are risks of course, specifically that what you believed to be a non-crisis turns out to be something genuinely nasty. It happens and that is the risk you need to be able to take.

A share like Shell has a powerful balance sheet and that is what you must seek with the crisis play. A share which at root is a strong company as demonstrated by value features and upon which the problem that has hit the price is not going to have any serious longer term effect in your opinion. Some way down the line, if you called it right, the share should recover to its previous rating and while you were waiting you will probably have received a decent yield in true value style.

As always with value styles patience is needed, as is an ability to trust your own judgement and to ignore press comment or sometimes to use it in a contrary way. For example, adverse press comment helps to drive down the price at first thus making it attractive to the investor. A while later you may start seeing comment telling how wonderful the share is, quite forgetting that a short time back investors were advised to shun it. Use the latter as your exit signal.

And don't forget that the last thing a crisis player wants is a crisis.

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