By Algy Hall , 04 May 2012
Stock screens can be a marvellous source of investment ideas, but with a few noteworthy exceptions, they need to be treated as a basis for further research rather than a buy list. There’s one stock in particular that has regularly cropped up on our screens over the past year that seems to capture this premise more than most – Fidessa. A year ago the financial-software company was ticking all the right boxes for our screens as a growth stock, then, following share price falls, it was scoring points as a cash-rich company. More recently the stock has appeared as part of a dividend-focused contrarian share screen.
As the nature and chronology of these screens suggest, Fidessa has experienced something of a fall from grace. Anyone who backed it as a growth stock a year ago will unfortunately be disappointed. Indeed, it has lost its status as a growth darling and, if one is being kind, has started to resemble something more akin to a recovery play. However, pitfalls could still exist from anyone taking the steer of our recent contrarian screen (you can read more in this week's cover feature here), which was based on a stock-picking approach advocated by US fund-management legend David Dreman (pictured below).
The problem with a situation like that seen at Fidessa is that it is often hard for a stock screen to identify when the company hits a point of change. In Fidessa’s case the company has moved from having a super-high growth rate to something far more pedestrian. According to data from S&P CapitalIQ, consensus forecast for Fidessa’s EPS growth rate in the coming year is only 2 per cent. Indeed, we moved the shares to a sell at 1,590p soon before they cropped up on our “cash comforters” stock screen and the negative stance has remained in place following a recent trading update.
Fidessa also makes a particularly interesting example of a stock that is perhaps not all that it seems when assessed as an income play, as our recent screen has tried to do. The historic yield from the shares is 5.3 per cent, but much of this – 45p of 81.5p – represents a special dividend. The special dividend is a regular feature for Fidessa, but nevertheless, it is special and therefore not to be expected. Brokers reckon the total payout year will come in at about 5 per cent as the company has £71m cash, but last year’s regular dividend payment represented a rather meagre yield of just 2.3 per cent**.
This hardly seems an ideal for a company that is part of a high-yield screen, and a forecast PE ratio of 18 hardly makes Fidessa look like what most people would consider a contrarian bet just yet. That’s not to say there aren’t grounds for some investors hopes that a move into the derivatives market will see the group recapture past glories, but the IC’s view remains a sell.
The moral of this story: use screen to generate ideas but then do your own research. While many screens devised by investment stars show something of a disdain for analyst’s forecasts and opt against using them as a stock picking determinant, this can leave them more exposed to being paying too much attention to the rear view mirror rather than the bumps in the road ahead. Naturally, here at the IC it's these that we're trying to spot.