Archive for the 'Stock Screens' Category

I think I’m Turning Japanese . . . (I really think so)*

I have been happy to watch the markets rise for the past few months, but I must admit that I am running out of ideas for new investments in Europe and the UK. There are many stocks with the book value characteristics or P/S characteristics that I seek, but they do not have the returns or balance sheets that I am interested in.

The rally in the past few months has to my mind been a cyclical bull market rally in a secular bear market. I do not think that the great de-rating is over (particularly with regard to the average US quoted equity).

The Japanese market stands out as being different from many other stock market indices. Maybe the derating suffered by Japanese equities during their 20 year secular bear market is an image of the future for many other equity markets. Two blog posts this week by Neonomic and Valueandopportunity have reminded me to get off my ass and run some of my favourite and most trusted valuation screens for Japanese equities. Now just because a security has fallen for a prolonged period of time doesnt mean that it is now good value. Maybe the security was significantly overvalued in the first place (which was deinitely the case with Japanese equities at the end of the 1980’s). It is should be pointed out, that Japanese equities have proven to be a value trap for many value investors. There has been very no real discernable catalyst in a country where corporate governance is generally appauling.

Some of my ex colleagues who are responsible for http://www.valueinstitute.org/ have published two very interesting articles on Japanes corporate governance or the lack thereof:

Lessonson Japanese Corporate Governance

Is Japan a Value Trap

My favourite Stock-Screens

I typically run 4 screens:

  • P/B, gearing and RoE,
  • Graham & Dodd PE,
  • P/S, Current profit margin & 10 year average margin
  • Net/Net Screen.

I use my stock-screeens to deliver a menu of delights that I typically like to dine on. From that menu, I then choose my victuals.

There are investors that are of the view that the human being is such an inferior investor that one should run scrrens that have a high probability of being successful and go long the stocks in the screen. While I agree with much of those sentiments, I do actually enjoy equity analysis, reading annual reports and building valuation models.

  • Price/Book Screen

There are four parameters in my P/B screen and all are equally weighted.

  1. P/B less than 1
  2. RoE (latest FY)
  3. RoE (10yr avg)
  4. Debt/Equity Ratio

These criteria were used to screen the 400 largest equities in Japan,

Firstly some descriptive statistics from the aggregate 400 companies screened.

P/B 1.18
RoE 8.0%
RoE 10 yr avg 7.9%
Gearing 30%

In a manner, this can be viewed as a valuation for the Japanese equity market. While the P/B ratio is low, so too is the current RoE and the ten year average RoE.  If I were viewing this as a stock that on average delivered an 8% return, I would deduce that this type of return deserved a P/B ratio of no greater than unity.

Of the 400 stocks screended, 180 of them had a P/B ratio of 1 or below.

The 25 most interesting to me are listed below (some of them are pretty small).

Ticker Company P/B RoE RoE 10y Avg Gearing Mkt Cap
9997 Belluna 0.4 9.5 10.8 4 30025
8248 Nissen 0.7 18 15.6 4 18333
9433 KDDI Corp 0.9 17.2 15.2 37 2086797
3086 J. Front 0.8 4.4 13.4 22 195592
3337 Circle K Sunkus 0.7 8.3 11.3 -47 109715
9945 Plenus Co Ltd 0.9 7 14.5 -38 50552
9432 NTT 0.6 7.7 9.5 29 4802091
6498 Kitz 0.8 8.1 12.2 32 37355
5444 Yamato Kogyo 0.9 4.2 13.4 -33 168908
9435 Hikari Tsushin 0.9 1.2 13 1 108232
3088 Matsumotokiyoshi 0.8 10.3 11 14 78033
1951 Kyowa Exeo 0.7 6 9.5 3 74784
8219 Aoyama Trading 0.4 3 5.4 -16 87868
6804 Hosiden Corp 0.6 2 8 -43 38698
9749 Fuji Soft 0.6 4.9 7.8 40 46458
5423 Tokyo Steel Mnfg 0.6 -4.2 7.7 -4 87897
8060 Canon Marketing 0.5 2.9 6.4 -39 130737
3635 Tecmo Koei 0.8 5.1 10.2 -19 53940
8233 Takashimaya 0.8 3 10.1 20 193656
8031 Mitsui & Co Ltd 1 16.6 12.6 42 2385051
9370 Yusen Logistics 1 7.3 12 -41 47441
4812 Information Services 0.6 7.2 7 -1 20462
7862 Toppan Forms 0.7 4.7 8 -22 77625
4043 Tokuyama 0.6 5 6.8 14 102995
4182 Mitsubishi Gas 0.9 11.9 10 47 214703

 

  • Net/Net screen

The net net filter is a particularly difficult screen in that it seeks to find stocks that trade at a discount to the value of Net Working Capital. In effect it is a seeking for stocks that are valued below the windown value of the company. The following stocks have a P/NetNet of 1x or lower:

Ticker Company Name P/NetNet
6804 Hosiden Corp 0.59
6349 Komori Corp 0.75
6751 Japan Radio 0.76
1973 NEC Networks 0.82
6839 Funai Electric 0.87
6986 Futaba Corp 0.88
8060 Canon Marketing 0.89
5901 Toyo Seikan 0.91
6581 Hitachi Koki 0.92
8130 Sangetsu 0.97
6134 Fuji Machine 1.01

 

  • Graham & Dodd PE Screen

With the G&D PE screen I am seeking stocks where the Price to average earnings (over the past decade is low), preferrably single digit. 

Ticker Company Name MktCap RoE(10yr) PE 10
7202 Isuzu Motors 693003 41.7 3.8
8248 Nissen 18333 15.6 4.5
6460 Sega Sammy 387630 22.4 5.8
7201 Nissan Motor 3166634 18.9 5.8
9433 KDDI Corp 2086797 15.2 5.9
3086 J. Front 195592 13.4 6.0
2168 Pasona Group 27039 18 6.1
3337 Circle K Sunkus 109715 11.3 6.2
9945 Plenus Co Ltd 50552 14.5 6.2
9432 NTT 4802091 9.5 6.3
6498 Kitz 37355 12.2 6.6
5444 Yamato Kogyo 168908 13.4 6.7
9435 Hikari Tsushin 108232 13 6.9
3088 Matsumotokiyoshi 78033 11 7.3
1951 Kyowa Exeo 74784 9.5 7.4
3635 Tecmo Koei 53940 10.2 7.8
8233 Takashimaya 193656 10.1 7.9
7453 Ryohin Keikaku 103409 15.1 7.9
6302 Sumitomo Heavy Ind 259279 14.5 8.3
2685 Point 73425 33.7 8.3
9370 Yusen Logistics 47441 12 8.3
4902 Konica Minolta 323439 13.1 8.4
9766 Konami Corp 280587 13.1 8.4
5214 Nippon Elec Glass 333291 15.4 8.4
6366 Chiyoda Corp 226455 14.2 8.5
8058 Mitsubishi Corp 2928357 12.9 8.5
6448 Brother Industries 257210 14.9 8.7
4768 Otsuka 180475 15.8 8.9
5713 Sumitomo Metal Mng 635064 13.5 8.9
9437 NTT DoCoMo 5639513 13.4 9.0
4182 Mitsubishi Gas 214703 10 9.0
8242 H2O 119442 8.8 9.1
3391 Tsuruha 96741 12.1 9.1
6417 Sankyo (Machinery) 347676 10.9 9.2
6278 Union Tool 28971 8.7 9.2
4205 Zeon 157855 14 9.3
7267 Honda Motor 4992377 12.9 9.3
1928 Sekisui House 481769 8.6 9.3
9831 Yamada Denki 514387 12.8 9.4
6839 Funai Electric 60655 8.4 9.5
3101 Toyobo 99230 10.5 9.5
5110 Sumitomo Rubber Ind 250796 11.5 9.6
5108 Bridgestone Corp 1350876 10.4 9.6
8281 Xebio 85344 8.3 9.6
6383 Daifuku 49245 8.3 9.6
7261 Mazda Motor 256676 9.2 9.8
2871 Nichirei Corp 111982 10.2 9.8
7451 Mitsubishi Shokuhin 121889 11.2 9.8

There are a surprisingly high amount of equities that are trading on low PE10 ratios that have reasonably decent returns and low leverage.

  • Price/Sales Screen

 The stocks that I have screened that have low P/S ratio, but that the historic margin seems to be undervalued by that valuation are listed below:

Ticker Company Name MktCap P/S EBIT% 10yr Margin
9997 Belluna 30025 0.2 7% 7.6%
7248 Calsonic Kansei 123535 0.1 3% 3.4%
2168 Pasona Group 27039 0.1 2% 2.9%
9432 NTT 4802091 0.5 13% 13.8%
6498 Kitz 37355 0.4 6% 10.2%
1878 Daito Trust 543244 0.4 7% 9.4%
3337 Circle K Sunkus 109715 0.5 10% 11.0%
3088 Matsumotokiyoshi 78033 0.2 4% 4.2%
9719 SCSK 118147 0.5 5% 10.2%
2282 Nippon Meat 208456 0.2 4% 3.8%
7270 Fuji Heavy Inds 409637 0.3 5% 5.6%
6770 Alps Electric 111483 0.3 5% 5.3%
9945 Plenus Co Ltd 50552 0.4 5% 6.9%
6702 Fujitsu Ltd 819574 0.3 3% 5.1%
2678 Askul 37526 0.2 3% 3.3%
4043 Tokuyama 102995 0.5 7% 8.1%
8016 Onward Holdings 101217 0.4 5% 6.5%
9861 Yoshinoya Hldgs 54636 0.3 3% 4.7%
6724 Seiko Epson 205787 0.3 3% 4.5%

The P/S screen is one that I like a lot. In general it gets much less attention than other value screens. The way I use this screen is to look at the P/S ratio and then compare current margins with historic average margins. I use a Gordon Growth type model adjusted for P/S as opposed to price to decide what is an appropriate multiple for a given level of profit margin at a static 10% cost of equity with 1% terminal growth assumption. This screen has helped me uncover many gems over many years. The idea is simple ~ as margins fall from the long term average the derating can be harsher than the margin decline. If margins are mean reverting and cyclical as opposed to the business model being impaired then one may have unearthed some treasure.

Conclusion

In truth I have never much enjoyed analysing or investing in Japan. There are many reason, from the poor state of many financial statements provided by companies to the fact that a lot of Japanese companies that I have looked at in the past seem to have pedestrian if not mediocre returns profiles. Then there is the corporate governance issue – however I do feel that Japan gets a poor rap here. Corporate governance in many European markets has been poor (but I do concede that it has improved notably in Germany and the Netherlands). It is my opinion that in many Spanish and Italian equities that corporate governance is not only poor, but simply non existant.

I do accept that I will not change how companies conduct business, nor is that my remit. So instead I will try and focus on what has worked for me in the past. In that regard, I was pleasantly surprised at the amount of companies that have above average returns and low valuations. A good many of these have little or no gearing on the balance sheet.

I am going to begin my analysis by looking at the telecoms operators (KDDI, NTT and NTT DoCoMo), for no other reason than they appear across all of my screens. In generaal I am wary of telco’s given that I believe they are deflationary and highly regulated. Being a bear on China, I wouldnt mind staying clear of Japanese companies that have a lot of export related exposure to China (particularly Steel). So in this regard, looking a domestic plays seems like a good place to begin (I may find out that these guys have a lot of foreign exposure).

*Apologies to The Vapours

Are Eurozone Equities good value? Part 1

In many of my posts thus far, I have commented that the European equity indices are becoming more attractive in terms of long-term valuation – specifically in terms of P/B and Graham & Dodd PE. In spite of this apparent value, I am not anyway near fully invested with my own funds. The reasons for this are simple:

(i) I am of the view that we remain in a secular bear market for equities that began in 2000. In secular bear markets, equities typically spend at least a decade if not 15+ years de-rating until the valuation is low enough.

(ii) On the basis of prior valuation lows, I am not sure that we are there yet in terms of overall market valuation. Getting there, but not there.

(iii) I have had a suspicion that the reason European indices look so attractive from a valuation stance is that financial equities still make up a large proportion of many European regional/country indices. If much of the valuation of European equity indices is being driven by a combination of the weigting of banks in the index and exceptionally low valuations for banks, then it might just be the case the a valuation argument for European equities in general is illusory.

The purpose of this post is to ask, do European equities represent good value? The first post will concentrate on Austria, Belgium, Ireland, the Netherlands and Portugal. The second post will look at the major equity indices in Germany, France, Spain and Italy. Greece is not represented, simply as I do not want to take the currency risk that I feel is coming their way. There will be a time to look at Greece.

As it stands today, the P/B for MSCI Europe is 1.3x and the Schiller PE is 12x.

Source: Morgan Stanley, European Equity Strategy, 28 Nov 2011. Secker, Carr, Garman & Lim.

It would appear that we are at or below average valuations for Europe. The P/S graph reproduced from the Morgan Stanley strategy report is interesting. It specifically excludes financial stocks, revealing that MSCI Europe is trading at its long run average multiple. The Schiller PE is below average and includes financial equities. This supports my assertion that when the stocks of Banks and Insurance companies are excluded, that the average European equity is not compelling in terms of valuation.

Country Analysis

Austria

Graham & Dodd PE: 12x

Price/Book: 0.8x

(This portion of the post has been edited. An eagle-eyed reader has pointed out to me that some of the valuation data for some previously mentioned Austrian stocks was incorrect. Having checked this I have found that the feed for market capitalisation that I used only accounted for the protion of the market cap in the index, which differed materially from the actual market cap. Apologies for this).

Of the seven stocks with single digit PE10 ratios, there are two banks (Erste & Raiffeisen), two are construction stocks (Strabag & Wienerberger), the remainder are utilities and energy companies. MOV maybe worth a look at. But I am not that interested in adding Austrian banks to my research list presently. Other than these stocks, which also appear on the low P/B list – the other low P/B stocks in Austria are predominantly real estate vehicles.

Belgium

Graham & Dodd PE: 13.2x

Price/Book: 0.99x

Stocks with lower PE10 ratios than the market include:

Dexia 0.4
KBC 2.9
Solvay 8.1
Belgacom 10.0
Mobistar 10.3
Ackermans Van Haren 11.9
Bekaert 11.9
GBL 12.5
Delhaize 12.8

 Two of these stocks are financial holding companies, two are banks, two are telecom operators.

In terms of P/B multiples, we get the following picture,

Dexia 0.08
KBC 0.18
Ageas 0.40
GBL 0.54
GDF Suez 0.71
Cofinimmo 0.81
Solvay 0.81
Befimmo 0.81
Delhaize 0.88
Bekaert 0.99

Three stocks here catch my eye, namely Delhaize, Solvay and GBL (Groupe Bruxelles Lambert). It would appear that Solvay and GBL have large net cash positions and are trading on low book and earning multiples.

Ireland

Graham & Dodd PE: 15.2x

Price/Book: 1.2X

The Irish market was one of the strongest performers in Europe during 2011, recording a 0.6% decline on the year. Not bad considering that many markets fell over 10% during 2011.

I terms of what stands out is that Ryanair, Kerry Group. ARYTZA and Paddy Power all trade on a PE10 of greater than 20x. Hardly appealing in terms of valuation. Many of the companies have grown successfully over the past decade. This growth in revenue and earnings is naturally reflected in a higher rating. Much of this is deserved, but how much I don’t know.

CRH is valued at 1.1x P/B and a PE10 of 13.2. Significantly more appealing in terms of valuation.

The real bargains in the Irish market are to be found in financials, where Bank of Ireland is presently trading on a P/B of 0.31 and a PE10 of 4.3. The leading Irish non-life insurer, FBD Holdings is trading on a P/B of 1.2 and a PE10 0f 3x.

Elsewhere , Grafton Group, Independent News and Media, Total Produce and Abbey all trade on single digit Graham and Dodd PE’s.

Netherlands

Graham & Dodd PE: 13.2x

Price/Book: 1.39x

Once again the low PE10 ratio stocks are dominated by financials (Aegon, ING Group and Corio).

Aegon 3.8
ING Group 5.1
ArcelorMittal 8.7
KPN 9.1
Corio 9.8
Philips 9.9
Wolters Kluwer 10.4

At the other end of the valuation spectrum there is Heineken NV (23x), Fugro (24x), Unilever NV (31x) and ASML (48x). All in all, there are some fine companies in the main Dutch index, but there is nothing that I am particularly attracted to.

Portugal

The Lisbon Index finished 2011 down 19%.

Graham & Dodd PE: 16x

Price/Book: 1.03x

The high PE10 for the Portuguese market is down to the high weighting and high valuation of retailer, Jeronimo Martins in the index (PE10 = 65).

What is immediately striking about the Portuguese market for me, is that other than the banks, many of the non-financial equities are very highly leveraged.

Company P/B Gearing ROE G&D PE
BCP 0.14 1439% 7% 2.11
BPI 0.55 5051% 24% 2.31
REN 0.52 237% 11% 2.81
Banif Financial 0.19 1687% 4% 4.24
Semapa 0.64 108% 14% 4.44
BES 0.29 1334% 6% 4.85
Mota Egil 0.54 287% 10% 5.49
Sonae 0.70 218% 11% 6.28
EDP   1.11 214% 18% 6.34
Brisa 0.94 142% 14% 6.65

Of the 10 stocks with single digit Graham & Dodd PE’s, 4 are banks (BCP, BES, BPI, Banif). REN and EDP are utilities, (as is BRISA for that matter). Given the low through the cycle RoE combined with high amounts of leverage, there is nothing that stands out to me as being particularly appealing.

Conclusion

In terms of secondary equity markets in Europe, only Austria as an index offers highly attractive valuations across the board. The other indices are trading close to or at a premium to the MSCI Europe average. This post, is not however about trying to ascertain what is cheap relative to a particular index. Instead, its purpose is to lift the lid of the index, and find out what is driving the valuation. In remain with the impression that it is largely financials, telecoms/utilities and construction stocks that are responsible for the low valuation present in European equity indices.

There is nothing necessarily wrong with that. Many value investors will choose to simply follow the value. In this regard however, it is worth recalling that financials typically trade at a discount to the overall market due to wafer thin profit margins and the highly leveraged nature of the business. This is not a recent phenomenon, but a historical one. The question for investors in financials to answer is that has the level of discounting been overdone and what are the risks to the business case going forward.

In terms of other areas, the amount of construction stocks appearing is a constant. I accept that they are cyclical in nature, but that does not mean that the businesses are inherently low quality or highly risky per se. Unless I see another compelling stock in the construction arena, I will more than likely add Heijmans NV to my portfolio. I am also keeping a close eye on Grafton Group plc and Morgan Sindall plc.

On the basis of the screens undertaken thus far, I am minded to do some more digging around in the following

Group Bruxelles Lambert – Belgian holding company with significant cash firepower trading at deep discount to book value.

Delhaize – Belgian retailer with a presence internationally. Appears to offer reasonable value and a good track record.

Solvay – Belgian listed chemicals company with low valuation, reasonable returns history and strong track record.

Part 2 of this post will look more deeply at the valuation of stocks in Germany, France, Spain and Italy. Some of these markets in particular have some very high weighting of financials in the index. Hopefully there is more on offer to a value investor than some bombed out European banks.

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.


Archives

John McElligott

Stocks

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 106 other followers


%d bloggers like this: