VALUE INVESTING
Watch Lists And Price Drops

By Stephen Bland (TMFPyad)
October 8, 2004

If you trawl for value shares setting, for example, P/TBV under 1 as one of your criteria, as I do with PYAD shares, then you will miss out on those shares whose ratio is over 1 - even if they are only marginally above. You may overlook shares that might otherwise have attractive features, which with PYAD means low P/E, high yield and net cash, or whatever your pet value characteristics happen to be.

One way around this is to weaken somewhat the filter which fails the test - not with the intention of buying the share on weakened criteria, but in order to put it on a watch list of almost-PYAD shares (or your particular variation on the value theme). The reason is that the price may fall due to market noise and, consequently, the share could then completely fulfil your requirements. Although, in theory, this appears unnecessary - because a later mechanical filter after the fall should pick this up anyway - in practice, it is not always that simple.

For example, the REFS database uses only the last full accounts for asset values, with no updates for interims or subsequent news. But if you are aware of a different valuation, for example, because some property is in the accounts at old figures which, at current prices, is worth much more, then you can work out a more accurate ratio for the P/TBV.

It may happen that the share trades at a little over 1 on your valuation, but the other value criteria are sufficiently attractive to warrant a buy. All you want to complete the picture, to minimise the downside and bet big on it, is for the ratio to slip decently below 1. By placing the share on a watch list, you can monitor the price regularly and, if it ever goes to the level you're seeking, you'll know all about it. Of course, it may never do so, but then so what? You haven't lost anything apart from the time involved. These days, watch lists can be monitored pretty simply by using email alerts from a financial website - many provide this service for free, I understand.

A secondary benefit from adopting this approach is that the other price-based filters, such as yield and P/E, will also be improved by a noise-based price fall. As always, you would need to check the latest news to see whether any watch-list price fall was, in fact, noise – as far as you can establish – rather than any change in the fundamentals.

Depending upon how much of a margin you have set for yourself in the weakening of the filter, it may not take much of a move to trigger it. Let's say you find an otherwise attractive value share, which is trading at a P/TBV of 1.1. You put it on your watch list so that a fall of about 9% would cause the ratio to hit 1, with any larger fall causing it to go below 1. So, a fall of 10% would just about do the trick. That figure is the price you set on your list.

So, for example, if a share has tangible assets of 100p and currently trades at 110p, you set the watch-list trigger price at 99p. It's a buy at that price or below. If the price does not fall, you could always weaken your criteria and buy anyway, even if all the filters have not been met, but I am concerned here with the situation where an investor is sticking firmly to the rules that they have set for themselves.

This system of allowing for a margin of inferiority for putting the share on a watch list does not apply only to P/TBV situations. The same could be said for yield, P/E, etc. However, I find P/TBV the most important downside minimisation criterion, especially with smaller caps. In other words, from the point of view of protecting your investment, it is more important to get P/TBV below 1 than it is to find a yield at least 50% above the market. Dividends and earnings can evaporate easily; tangible assets, especially if they consist of the valuable sort, such as property, cannot so easily be given up.

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