Opportunity knocks as the bear roars.

I have narrowed down the results of my recent P/B stock screen as follows:

Home Retail Group – Value seems outstanding, however I have been badly beaten up in the past by investing in bombed out UK retail franchises (Dixons for example). The balance sheet has net cash, but there are heavy lease obligations and the company persists on opening stores. With an increasing amount of Argos’ sales coming through the internet channel, this is possibly not the best strategy in a downturn. Even after goodwill is deducted the stock trades below book vale and on a crazily low sales multiple. Scores a 7 on my latest Piotroski score. Definitely worth some indepth analysis.

Grafton PLC– stock has acted pretty well in the recent sell off. Again, trades below book value, but there is substantial goodwill on the balance sheet. I need to be careful with this one, in that I have admired the old management for a long while.

Abbey PLC – While the Piotroski score is lower than I should invest in, I think that it is for the right reasons. An Irish based housebuilder that built a warchest over the course of the recession and is using the cash to buy a landbank. To me that sounds like a situation that is pregnanat with opportunity and possibilities. Balance sheet is in good shape.

E.ON – Intangibles account for almost half the book value, so again, is this actually good value? Cashflow is lumpy. Curiosity value more than anything attracts me to make a more indepth investigation.

Vivendi – There are a large amount of intangibles on the Balance Sheet, so it is questionable as to whether the stock actually trades below book value. With a dividend yield approaching 9%, the sustainability of this is a key question for me.

To this collection the recent sell off has given me reason to consider investing in the following:

CRH – Yes, austerity in the USA will not exactly help a company that depends on Government spending for revenue. One of the best in class when it comes to operating performance within its sector historically. Sometimes when good companies fall to low valuations you have to buy them. Is this a case in point?

Barclays – The banking commission could hurt. Refunds of missold products as well as CDO portfolio restructuring have hurt. Trades at less than 0.5x tangible book value. Reasonably well capitalised as banks go. I am certain that banking will continue to exist. It will for the forseeable future trade at lower multiples than the past 15 years. Thus we go back to being a book value business that pays dividends and earns modest returns. If that is the case then Barclays offers a significant amount of opportunity for me.

Italian Banks – I just have to have a peak.  

I am mindful of chasing falling knives as the market cascades lower, however I have been patiently on the sidelines awaiting such moves. It would be a travesty if having waited for a good opportunity to begin building an investment portfolio to sit idly by as opportunities present themselves.

1 Response to “Opportunity knocks as the bear roars.”


  1. 1 Brent Farler August 4, 2011 at 9:50 pm

    I look at free cash flows and adjustments (which requires going into the annual/quarterly statements) to separate the good from the bad in the results of the screens. Too many companies manipulate the adjustments to smooth over a bad quarter.

    In the 80’s and 90’s I worked for a tech company owned by a automotive company that had a repetitious record of 3 good years followed by a really, really bad quarter. You could always tell when they were running out of room to manufacture profits, our signal as employees was draconian restrictions on business travel and buying office supplies – literally anything they could do to make one last quarter so the exec’s could sell their options. The adjustments told the story in the form of manipulated revenue recognition, pension fund raiding and transactions with customers (loans to customers to buy services was a good one). The management was eventually bought off by paying $35M US for the CEO to leave.

    As a result I ignore P/E almost completely. I want to look at cash flows and then calculate my own version of their earnings. For example if a company stops investing in the future after a consistent track record it is a good sign that they are avoiding an earnings miss or something more fundamental is going on in their business.


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John McElligott

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