UK Value Investor

Following on from my thoughts in the last post I've added Luminar to the portfolio.  Luminar run popular venues where people can meet, eat, drink and dance.  This is the first new holding in almost five months and it feels good to have a change at last.  Instead of funding this purchase with the dividend from Waterman as originally intended, I sold my holdings of Electronic Data Processing (EDP) and used the proceeds plus some cash.  The affect on the portfolio is to add about £20k to its book value since Luminar is so much cheaper, although as I said before I'd be surprised if that didn't come down again.

Sale review of EDP 
Electronic Data Processing is the largest IT solution provider to the UK independent builders and timber merchants market place.  I bought shares in EDP on the 28th of August 2009.  At that time I thought the book value was about £14 million, which put the price/book ratio at under 0.5 and well within my target range.  The rest of the structure of the balance sheet was good, current and quick ratios were fine and the company had net cash.  However, I failed to spot that a recent share buy-back had been used to return some £6 million of excess cash back to shareholders.  So in fact the price/book ratio was about 0.8, far above what I'm after and only with a 25% expected upside.

The sale of EDP had been on my mind for a while and really I was just waiting for something better to come along.  Recently the share price had climbed back in to profit so that was enough to make me back Luminar instead.  In terms of results, I made 6.6% after fees for an annual rate of about 12%.

Purchase review of Luminar

Luminar is very different to EDP.  The price to book is worryingly less than 0.2, although the price to tangible book is still cheap but more reasonable 0.4.  These will change soon though as one of Luminar's holdings has gone bust which is expected to wipe about £17 million from the book value.  Even with that factored in the valuations are good.  Less good is the tangible gearing which is right around my limit of 100%, but given that the margin of safety is so wide I think I can accept somewhat more gearing than I'd like.

I've limited the amount invested in Luminar so that the target sale value isn't too large.  In other words, if I put 10% (~£6,000) into Luminar and the price went up to give a price/book of 1, then the holding would be valued at about £35,000, which would be about 40% of the total portfolio.  Far more than I'd like in a single company... especially one as highly geared as Luminar.

Mallett Final Results

Mallett, one of the largest and most exclusive antique dealers in the world and one of my holdings since 2008, have produced their final results for the year.  While they still made a loss the general mood is more upbeat as the cash position has improved, turnover is up and the loss is smaller than last year.  As the chairman says, "we are only part of the way through the task of re-engineering Mallett's business model and cost base in order to align them with the demands of a rapidly evolving marketplace", which is becoming a familiar phrase around here. 

I first bought Waterman on October 22nd 2009.  I had recently sold Harvard International for a profit of £4,102.82 and needed somewhere to put the proceeds and some additional cash.  Waterman marked a slight change in my rules.  Whereas before I would only invest when a company was trading below 2/3 of tangible book, I decided to allow intangibles into my valuations. 

Alexon Group is a ladies clothing retailer. They have brands such as Ann Harvey and Bay Trading. The numbers when I bought were:

debt/equity = 1.33
price/book = 0.2
price/tangible book = 0.31
price/net net value = 0.54

So it hits all the criteria I currently use.

Alba sell electronic consumer goods. Alba’s UK Consumer Electronics Division incorporates brands, such as Alba, Bush, Goodmans and Grundig. The numbers when I bought were:

debt/equity = 0.34
price/book = 0.2
price/tangible book = 0.2
price/net current asset value = 0.31

So by all accounts it's pretty cheap. Let's see if the management either burn all the cash and justify the current valuation or they turn a profit and so do I.

Northamber Plc is a United Kingdom-based company principally engaged in the supply of computer hardware, computer printers and peripheral products, computer telephony products and other electronic transmission equipment.

Price/book = 0.34
price/tangible book = 0.34
price/(current assets - all liabilities) = 0.39

In the last few years it's been making a small profit and paying a dividend. Price has ranged between 117p and the current lows around 30p.

Lets see what the next few years bring.

Price/Book =0.43

I bought Titon Holdings (TON) today. They are a leading UK supplier of Ventilation Systems and Window Hardware.

Notable features were low debt, with current assets (9M) enough to pay of all liabilities (2.7M), leaving 6.3M and a current market cap of 3.1M. So you could buy the whole company, close it down and take the cash in the bank (almost 2M), sell all the stock and collect receivables and make a profit.

The share price has floated around 100p for the last decade, but since the credit crunch and related housing slowdown their share price has collapsed to around 30p. The only reason I can see for this looking at the company reports is that profits halved in the last year and general market sentiment against the housing related sectors.

The plan is to sit back and wait for the cycle to turn and/or management to make the required changes and sell out above 60p. If that hasn't happened in 5 years I'll sell up and move on.

The details were:

Titon Holdings bought at 33p, market cap 3.1M, PB 0.3

I started my toe dipping exercise into value investing this month. The plan is to start out light and only buy once a month or when I sell something. I want to hold up to 20 stocks and also use the sliding cash system I thought about last time where the cash % is twice the average PE of the market.

The general idea is to buy stocks from the FTSE All Share index which fall in the lowest 20% market cap of the bottom 10% price/book. So if there are 500 companies in the index then I pick the 50 with the lowest PB and then the smallest 10 of those by market cap.

Many previous studies have shown that these stocks can outperform the market over the next few years after purchase. The gist is that markets are not 100% efficient and that they over do the gloom on certain stocks or just don't value them fairly.

My sell signal will either be when the company reaches a price/book ratio of 1, or when I've held the stock for 5 years, whichever comes first.

This month I bought:

Pendragon at 8p, market cap 62M, PB 0.15. This is a car dealership network and it's been pretty beat up in this recession.

Ennstone at 16.47p, market cap 81M, PB 0.4. This is a construction and materials company and has not surprisingly lost a lot of value recently.