VALUE INVESTING
Five Tiny PYAD Shares

By Stephen Bland (TMFPyad)
June 17, 2005

In my Value Investor newsletter I don't tip micro-cap value shares any longer. This is because we became a victim of our own success in that those we selected would often see the price jacked up way over our tip figure in a very illiquid market, before investors had a chance to buy. Couple that with the often ridiculously large spreads of micro caps and I decided recently that these should be avoided, even if they looked attractive on paper, because investors would find it extremely difficult to score. I have therefore moved towards larger cap value trading shares though many will still be small by the standards of the market in general.

However, that doesn't mean that individual value investors doing their own research shouldn't consider micro caps. Often, this is where the really deep or pyad value is to be found. I stress that people should be aware of the increased risks such as the above mentioned illiquidity and large spreads plus lack of broker research and forecasts and what I perceive as lesser director integrity in their comments about future developments etc.

These increased risks mean that my view is that Price/Tangible Book becomes much more important, especially when book consists of valuable assets like cash and property. I would expect to see a trade off against the much greater risks of micro caps by finding increased discounts to assets over what one might settle for with a much larger cap value play.

Here's a list of all companies with a cap of under £10m satisfying the four pyad criteria, on paper, which I have extracted from a database search. Note that asset and net cash figures used in this were from the last annual accounts whereas eps and dividends are forecasts. It follows that the assets and cash could be out of date to the point where they are not valid at all. Furthermore, the eps and yields I used may well also be invalid because these companies will not have many forecasts and those they do may have been negated by more recent news.

I stress that I am not tipping these shares here, merely showing the results of a mechanical database search on the four pyad features and have not investigated them any further. Interested investors must look deeper into the more current situation if they wish to take these further, including establishing the nature of the assets concerned.

I would be very unlikely to tip these five in Value Investor, even if further research showed them still to be full pyad plays with valuable assets, rising eps etc. simply because of the problems with micro caps referred to above.

With my own value plays over the years, I have fluctuated between periods of setting a minimum cap and at other points buying anything regardless of cap that fitted my pyad profile. Other things being equal I always preferred a larger value play to a smaller one for all the reasons that make smaller caps more risky. But in practice, other things are rarely if ever equal in that one is unlikely to experience the luxury of having to choose between a larger cap or a smaller cap pyad share with otherwise similar attractions apart from cap.

I found too that as I had more and more to invest, very small or micro caps became difficult or impossible to trade in the amounts I preferred. Not a problem if you are only willing or able to stick a couple of gees into a share but that wasn't my style.

Because of the increased risks it makes sense for those wishing to trade micro cap value shares to stick with portfolios of several or use only a very limited proportion of their funds in this way. Value Investor will though stick with somewhat larger plays. Although the value will frequently have to be shallower than some micros, our tips will allow investors to make actual trades at around our prices and thus offer far more profitable opportunities for readers.

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