Deep & Dirty

Spending the past week pouring over the results of what I call my Deep & Dirty screens. This is a pretty simple Price/Book screen with a leverage overlay (Total Debt/Total Assets < 50%). On top of this I overlay a Piotroski screen, where I throw out any stocks where the F-Score is less than 6.

To be fair most data on the use of Piotroski Screens suggest looking for companies with a score of 7-9.

I was pleasantly surprised as to the results that this static screen produced. There was the usual clustering of companies from cost of capital/sub cost of capital industries (Paper Companies, Airlines). But there were also a few retailers, a fair few cement and aggregates producers, housebuilders and utiliites (though fewer than I expected).

I have examined most companies on a cursory basis, neglecting to include any companies that have consistently produced sub cost of capital returns, whilst also excluding companies that have had significant outperformance in the past three years. As I am nervous on the direction of the market, I prefer to avoid any securities that could suffer unduely from mean reversion or profit taking.

This leaves me with this motley crew from which to make my first selctions:

Company Mkt Cap Gearing F Score P/B
Abbey 117 0 5 0.7
Aer Lingus 368 0 7 0.6
Caltagirone 172 0 7 0.2
Constantin Medien 141 18 6 0.8
Cookson 2029 21 7 1.2
Delhaize 5048 28 6 1.1
DSM 6947 0 8 1.1
E.ON 35898 30 8 1.1
easyJet 1573 1 8 1.2
Endesa 22197 18 8 1.2
ENI 56763 32 7 1.2
Fyffes 142 0 8 0.8
Game Grp 117 0 3 0.8
Grafton 682 22 5 0.7
HeidelbergCement 7927 39 6 0.6
Heidelberger Druck 568 26 6 0.5
Heijmans 270 28 6 0.5
Jenoptik 343 22 6 0.9
Kingfisher 6840 1 6 1.0
Lufthansa 6571 18 8 0.8
Millennium Copthorne 1865 7 7 0.7
Persimmon 1640 4 6 0.7
Peugeot 6888 13 8 0.4
Public Power Corp 2030 38 7 0.4
PubliGroupe 292 0 8 0.6
Sanofi 73899 4 7 1.2
St Ives 114 2 8 0.5
Titan Cement 1214 37 7 0.9
Vivendi 21380 22 8 1.0

There are a smattering of companies from Ireland, Greece and Italy. That is expected goven the dismal returns generated from those equity markets recently, but I am surprised that there were not more names from the PIIGS. I will endevour to choose a few stocks from this to begin investing once again. There are companies there that do not meet my initial Piotroski F Score of 6 or greater, Abbey plc for example. However given that the company is sitting on a large cash pile, and is using that cashpile to purchase a landbank, I am granting it some leeway. A cashrich company purchasing assets that will generate furure cashflow and returns tends to be what I am looking for in undervalued situations.

From this list I will hopefully find a viable idea or two with which to act as a vehicle for my first serious foray back into the equity market as an investor as opposed to a trader. Obviously when running P/B screens one would tend to get many financials, and there are no financials in the aformentioned results. The gearing overlay naturally knocks all financials out of the screen. Despite this, it is an area that I will return to. I tend to think that in many cases the baby is being thrown out with the bathwater when to comes to investing in financials, banks in particular. At a cursory glance, the leading following leading European financial institutions are trading on interesting valuations. What I do not know at this stage is how much more dilution from equity raisings is to come, but it is an area worthy of investigation. I am not in the camp that the financial model is broken irreparably. Tarnished yes, in a need to delever, yes. But it is not broken – this is just what the other side of the economic cycle looks like.

Bank G&D PE P/B Equity/Assets
Barclays 5.30 0.57 3.40%
Soc Gen 6.60 0.57 4.10%
BNP Paribas 9.40 0.79 3.70%
Banco Santander 8.70 0.88 6.10%
BBVA 7.00 1.10 6.50%
Intesa San Paolo 6.40 0.53 8.10%
Unicredit 5.10 0.40 6.90%

Food for thought methinks.

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John McElligott


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