Friday Reading

Defining Value

Another week down, another roundup of some thought-provoking pieces.

I enjoyed UK Value Investor’s post on UK Mail, a share that’s been popping up on my screens. I must admit I discounted it when I first took a glance, both as it was more expensive back then and for some underlying reasons – I’m not quite as bullish on the long-term view of the industry as a whole as he is, for instance. That said, I’m not sure I can see where any further falls in mail volume would come from, and would really need to understand the specifics of the businesses operations – something I didn’t have time to the first time!

More importantly, it highlights something I’m increasingly thinking of (see my post on management intentions for a different twist) in relation to shares – how the dividend affects share price movements and total returns. I’m beginning to like dividends more and more as I think about them, not so much for the payout as such, but for the floor they provide to the share price. That is, of course, if they stay intact – but I suspect high dividends make a reconciliation of market price and ‘intrinsic value’ much faster. If I knew anything about bond pricing, I’d love to draw up a comparison between non-dividend small cap stocks on one side, strong dividend small cap stocks in the middle, and high yielding bonds on the other, and see if a pricing ‘continuum’ exists. Alas, I don’t, so I’m probably talking rubbish.

Richard Beddard’s quest to find truly cheap shares continues in deep micro-cap territory with Airea, a carpet manufacturer. Bargains like these – low price: net working capital stocks – first got me interested in value investing, and it’s funny to think how far and how fast I’ve deviated from that definition of a bargain. I still love the concept – I’m just so unsure of how the low PB or P:NWC feeds itself through to investor returns. I tend to look at balance sheet measures in two ways – either as a signal (along with other factors) of the financial stability of the company, or as assets which are available and should be returned to shareholders. The trouble is, I don’t often see that happening – firms just seem to continue holding too much inventory or utilising their capital poorly.

I’ve often thought I’d just look for nice low P/B stocks and then filter for ones which are highly cash generative i.e. liquidating the value locked up in their assets. The problem? I can’t seem to find them – if they’re returning cash to shareholders at a good rate, they don’t tend to be cheap! I’m sure they exist – I just wonder if there’s a good way of digging them out. I guess that’s Richard’s aim too – to cut out the dud shots and pick the ones which will really deliver on their promises. That said, I’m sure all investors want that!

Finally, sticking with today’s differing definitions of value, Mark Carter’s piece on Sportingbet brought back a thought of mine: I liked Sportingbet, but I didn’t like it being in takeover negotiations. It adds too much uncertainty to the price in the near term, and ensures the price will be driven largely by whether the takeover is successful or not – something which I have no idea about, so am not willing to speculate on. Reading the piece put it in my mind, though, and so I was rather pleased when the takeover was scuppered a few days later. Bad news for him (sorry Mark!) but great news for me, as it’s back in my sights. As he tweeted:

SBT: selling Turkish business for 125m (unchecked). Net cash 120m. mkt cap 255m. So get their remaining operating business for free.

Can’t really argue with that – though the disposal of the Turkish business isn’t best structured from a Sportingbet shareholder point of view. I’ll be digging into the reports over the weekend and seeing if I find anything to my liking.

4 Replies to “Friday Reading”

    • Lewis

      Very Britishly self-deprecating Richard, but we both know that historically sticking to your guns has paid off; just think of it as doing classical macroeconomics proud and specialising for the good of humanity!

  1. John Kingham

    Hi EV. I like to think of the dividend as a bit like the catalyst that a lot of value investors look for. They look for a reason as to why value will be released sooner rather than later – some good news or a takeover or whatever.

    For me, a high yield acts as a catalyst since investors (including me) love the realness of dividends. Buy a share yielding 6%, hold for say 5 years and you’ve got a 30% return, or thereabouts. No more waiting around for Mr Market to ‘realise’ the hidden value – the hidden value has been paid into your hand in cold hard cash.

    Not that I’m a dividend investor, but it’s an important aspect of valuation for me. You probably already know about PEGY…

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