VALUE INVESTING
Hunting Down The Best Value Plays

By Stephen Bland (TMFPyad)
July 1, 2005

In a recent issue of my Value Investor newsletter, I wrote recently about the idea of watch lists for those trading value shares. When trawling the market mechanically using some database in order to compile an initial short list of potential candidates for investment, there may be some shares that lie a little outside your filters, but which could upon a price fall, come within your net.

For example if you insist on P/TBV under 1, which I do as one of my original pyad value criteria, there could be a share of which you like the look, attractive on all other filters plus whatever further information you require on forecasts etc. but whose P/TBV ratio was a little over 1. In such a case a price fall driving the ratio below 1, caused merely by market noise in that the fundamentals are unchanged for the worse as far as you know, could then be the final buying signal.

In theory the next mechanical trawl on P/TBV < 1 following such a price drop should pick this up anyway, rendering watch lists unnecessary. However, my point is that the watch list should contain primarily those shares upon which you have already done the usual further research necessary, over and above the basic mechanical value features. Thus, all you have to do if the share delivers the price fall is a quick check to ensure unchanged fundamentals and you're in.

You create watch lists by loosening the price based filters. Set P/TBV to 1.1 for example. From the list then created, you do the same additional research that you would on a share that meets your requirements fully. This will then as usual knock out a lot of them, leaving you with a list of shares that you would buy if only the loosened filter were as tight as you normally demand it.

Since pyad or other series of value criteria consist of multiple filters, you need to decide how many of them and to what degree you will reduce the levels to go on to the watch list. But since the price based filters will all benefit from a fall in the price, in practice all of them can be loosened in a similar way. In Value Investor, I select shares for readers but many wish also to do their own investigations, something I encourage and have done so ever since I've been associated with the Fool.

For example using the original pyad levels with the market yield currently at 3% and P/E at 15, you could choose to loosen the screens by say 10%. Now the pyad figures required a P/E at least 2/3 of the market and yield at least 50% above it. Allowing 10% leeway means a P/E of 11, a yield of 4% and a P/TBV of 1.1, plus net cash which of course is not a price based filter. Produce a list of all shares satisfying these levels, check out the rest of it so that you know you have otherwise desirable shares and there's your watch list. A fall of at least 10% in the share price, unaccompanied by any adverse news on fundamentals, will then automatically deliver a good value shares.

Bear in mind that watch lists are temporary in the sense that companies publish accounts every six months and sometimes news in between too. In time then, the fundamentals must change to some extent for better or worse so you always need to recheck the validity of shares on the list after a while.

Here's an interesting asset play for a watch list. Pinewood Shepperton (LSE: PWS) has net assets of 111p per share against a share price of 120p. The share price has fallen heavily on the back of poor trading news, plus it's got a fair level of debt, being geared at around 78%. No pyad share then. On top of that little or no dividend is likely to be paid this year due to the poor trading. For the future they suggest that things may improve.

However the main attraction is that this company is loaded with freehold property to the extent of something like 198p per share, being the eminent, eponymous film studios. In fact almost all the tangible fixed assets consists of freehold property. Mmmm! Moreover, these studios are located in pretty desirable areas close to London. If the price gets much below the 111p net tangible assets figure this share may be a nice asset play to sit on.

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