VALUE INVESTING
Value Investor Bids for Success

By Stephen Bland (TMFPyad)
February 11, 2005

No, not any old value investor but the Value Investor, my monthly subscription tipsheet, where we've had an unusually high ratio of our trading selections being outed by a bid, producing good profits in each case.

In fact, we have held an orgy of selling in recent weeks, if five shares constitutes an orgy, and are pleased to have done so because they all delivered worthwhile profits. These five represent a significant proportion of the number of trading shares we have in play at present and increased substantially the number of total sells called since the newsletter began in January 2004 from five to nine. I'll be honest here and state that two of these sold earlier last year were real turkeys losing 58% and 49% whilst a third was sold with a small 3% loss. Our latest scorecard shows that overall our value picks in the newsletter are up 8.5% while the high yield selections have produced a 16.6% gain.

Back to my orgy. Starting with a sell on Mitchells & Butlers in December 2004 for a 34% total return, we followed up in early February with Hardys & Hansons making about 30%, HHG about 40% and Chamberlin & Hill about 35% and then capped that with Somerfield making another 30%. Somerfield and HHG were outed by bid approaches whilst the others were outed simply by higher valuations placed on them by the market.

The outing reasons don't really matter, when value goes we go regardless of why it has gone. I can't help noticing though that three of the sales we have called since Value Investor began were outed by bids, the above mentioned two plus Yates back in August last year. The latter delivered a profit of some 42% in only three months.

Now three bids so far is a relatively high proportion of our total number of selections to date. What I mean is that the percentage of bids in the market compared with the total number of shares listed in that same time can be only a tiny fraction of what we have experienced with our tips.

So what's going on here? Is our high bid ratio just chance or is there something else at work?

Something else is my answer. I believe that bid prospects are thrown in for free with value. Whilst I would never advocate buying a share with a potential bid as the main reason for going in, it is very likely that the same criteria that make a good value share are likely to appeal to bidders as well. And we find good value shares for you in Value Investor. They won't work every time, no trading strategy does that, the concept works by sufficient plays making money with the object of making good profits on balance over time.

Think about it, if you were interested in buying a company, you are likely to be looking to do so on the cheap, provided it has what you want. Perhaps you think you have better management skills than they do so you can turn it round. Whatever, the likelihood is that bidders will try and get what they require at the best price. A value share is one that is believed to be unreasonably cheap, exactly what a lot of bidders would be looking for.

So whilst yield is irrelevant to a bidder for a whole company, as distinct from a small investor to whom it does matter, the profit potential, assets and cash or debt situation are critically important. A company stuffed with cash makes an attractive target as does one with a low P/E so that profits can be acquired for a modest price compared with higher P/E alternatives. Similarly low P/TBV is also very attractive, far more so than higher P/TBV. Exactly the same kind of thing that value players seek.

So I don't think it is any accident that value investors may find a number of their holdings outed by bids over the years, far more than you might expect from the level of bid activity in the market in general. It is one more reason why value is such an attractive and effective strategy.

But don't think about bids when choosing your value shares, don't permit bid rumours to influence your judgement. If it happens, fine, but you cannot rely upon a bid outing your shares for you. You don't need to think about bids at all, the beauty of value is that it comes with this potential for free.

See what I mean by taking out a free 30-day trial to Value Investor.