Fools rush in where Angels fear to thread.

Other than Banks and Insurance stocks, there has been a clustering of sectors that are repeatedly showing up on my various value screens.

By and large it consists of various UK Retail stocks, construction type companies, utilities and pharmaceuticals. If you had been invested in any of these areas over the past three to five years, chances are you would be not be in a happy place at present.

From this list, my next round of research is going to concentrate on the following:

Construction Oriented stocks: (Grafton, Persimmon, Abbey, Titan Cement)

UK Retail  (Marks & Spencer, Kesa, Home Retail Group, Game Group)

Utilities (E.On, Endesa)

Pharma: (Astra Zeneca, Sanofi, Novartis)

Banks: (Barclays, Unicredit, Intesa San Paolo, Danske Bank)

To this I will also add OPAP and Ladbrokes – both gambling stocks (one Greek and one UK based).

For me the recent carnage in he market is the resumption of the Cyclical Bear within an overall Secular Bear market. While most folks in the market are obsessed about falling prices, a bear market also brings a compression of valuations. More than anything, that is what is at play presently.

The MSCI Europe is now trading at a Graham & Dodd PE of 12 ( A recent report by Morgan Stanley strategist Graham Secker finds a similar level of valuation in European indices ( I do believe that there is value emerging in some large cap US names (such as Microsoft, General Dynamics for example), but for now I am focusing on European names. MSCI Europe is trading at approximately 1.4x. Since 1988, the lows tend to come in about 1.2x, (however in reality this is not long enough a data series to be conclusive in terms of long term value).

For now, investors, should I belive switch off the Bloomberg/Reuters price feeds and switch on their stock screens.



3 Responses to “Fools rush in where Angels fear to thread.”

  1. 1 Philip O'Sullivan August 11, 2011 at 10:25 pm

    Hi John, an excellent blog as ever. Quite a few names there that I’ve traded before, one that overlaps with my current shortlist of preferences ( is Abbey. You can’t go wrong with it in my book given its rating and prudent management, but at the same time there isn’t a whole lot of potential catalysts for it in the short term either.

    Of the others, would you not be concerned about Game’s medium-longer term prospects? I have been attracted to it due to its extremely low EV/Sales rating, but my main concern is that it could turn out like HMV, while commentary from the likes of DCC suggests that large retailers such as Tesco are muscling in on Game’s core markets. Or is there another angle that’s attracting you to it?

    • 2 jmcelligott August 12, 2011 at 10:40 am

      Thanks Philip. I concur on Abbey, from the work that I am doing on it I think it looks very good indeed. However I was hoping that the market shakedown and the recent trend in UK property would give me a better entry point. Its on my buy list, but I am being greedy on price. If you are attracted by the likes of Abbey plc, then you should possibly look at Morgan Sindal also. I think in many respects it could be even better (but trades at a 1.2x book).

      As for Game, I have been intrigued by the value on offer across almost all UK retail formats. Game stood out as being really cheap amongst a host of cheap stocks. My goal is to discern between what is cheap and where there is value. I think that there are salutory lessons to be learned from the analysis of HMV, JJB Sports etc. UK retail in many cases is priced to destory value (or go out of business) indefinitely – that doesnt mean that that isnt the case however. My analysis is largely focusing on cashflow stability versus balance sheet strength. I am in the middle of analysining a host of UK retail stocks. My key focus is the following stress test
      (1) If Operating costs are assumed to be largely fixed, then,
      (2) how much do sales need to fall in the next 1 and 3 years,
      (3) for EBITDAR/fixed charges (ie interest and rental committments) to reach a dangerously low level.

      For example, when I originally ran the screens Home Retail Group screened very well. Upon further analysis I was surprised to see that due to Onerous Leases that the fixed charge cover is only 2x. (My back of envelope calculation suggests it is 1.67x for Game!!!).

      The issue for moost of the UK retail landscape is that so many of the retail footprint is simply underperforming, and the cost of closing these stores can be high due to the lease structure.
      I would like a margin of safety and it may simply not exist here. It requires more analysis.
      I would like to partake in what I percieve to be outstanding value in UK retail, but it requires much more analysis. There are too many folks that I see (and I have done this also) that fall into the trap of assuming that net cash on the balaance sheet means that the balance sheet is in good shape.

  2. 3 Philip O'Sullivan August 14, 2011 at 2:37 pm

    Hi John, I suspect that Abbey is being propped up by the share buybacks and the poor liquidity, with the CEO owning over 40% even before the buybacks started. Morgan Sindall certainly has its fans, not least in the Irish broker community – pals in two Dublin brokers have been pushing it to me in recent times! I need to find the time to properly delve into it.

    I agree with your points on the retail sector – perhaps another way of looking at it might be to look at the REITs and see which ones are vulnerable in terms of lease agreements – this could throw up some handy short opportunities?

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