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Three Genuine Value shares

Over the past three years my Genuine Value screen has delivered a 49 per cent total return compared with less than 10 per cent from the market
March 9, 2016

When it comes to investing, 'value' is a rather elusive ideal, so the fact that I have called this week's screen - now in its third year - 'Genuine Value' seems both portentous and preposterous - more so each time I update it. However, the screen itself, which is based on a souped-up price-to-earnings-growth (PEG) ratio, is doing pretty well despite the burden of its name.

Over the past three years the FTSE All-Share has only managed a meagre total return of 9.6 per cent compared with 49.2 per cent from the Genuine Value screen or 43.7 per cent (see graph) after factoring in a 1.25 per cent charge to account for the notional costs of switching between screen results were an investor to actually follow the screen results to the letter.

 

The past 12 months has been a difficult period, but the screen outperformed strongly with a negative 0.4 per cent compared with a negative 9 per cent from the market. Given the relatively limited criteria used by this screen, it does not come as too much of a surprise to see a wide variation in how the individual stocks selected by the screen performed. The only utterly dire performance from the 10 stocks selected almost a year ago came from nursing home provider Cambian, which was hammered on the back of a profit warning in October followed by another last month. The disappointments have sparked concerns about the company's ability to control costs.

NameTIDMTotal return (24 Mar 2015 - 1 Mar 2016)
Anite*AIE44.5%
Crest NicholsonCRST31.0%
CarnivalCCL16.2%
Barratt DevelopmentsBDEV15.3%
Galliford TryGFRD2.5%
CarcloCAR-2.4%
ClarksonCKN-14.7%
KellerKLR-14.8%
EssentraESNT-18.3%
CambianCMBN-63.4%
Average--0.4%
FTSE All-Share--9.0%

*Taken over

Source: Thomson Datastream

 

The central focus of the screen is a PEG ratio that also tries to factor in dividends and the amount of net debt or cash a company holds. The formula divides the enterprise value (market capitalisation plus debt minus cash)-to-operating profit ratio (EV/Ebit) by forecast EPS growth (I use the average forecast growth rate for the next two financial years) plus the historic dividend yield (DY). As a formula, this is what the 'Genuine Value' ratio looks like:

(EV/Ebit) / (Forward EPS growth + DY)

Two other factors are used in the screen to get a sense of investor sentiment towards each stock and the consistency of forecast EPS growth. The full screening criteria are:

■ A "Genuine Value" ratio among the lowest quarter of all stocks screened.

■ Three-month share price momentum among the top third of all stocks screened.

■ Above -average forecast EPS growth in each of the next two financial years. The average forecast growth rate must be less than 50 per cent - anything above this level is considered to be very likely to be highly unsustainable.

The screen has managed to come up with a healthy 18 stock portfolio this year. I've taken a closer look at the three stocks boasting the strongest three-month momentum below. Fundamentals relating to these stocks are published in the table that follows along with the details of the other stocks passing the screen ordered by strongest to weakest three-month momentum.

 

GENUINE VALUE SHARES

NameTIDMMkt capPriceGV ratioFwd NTM PEDYFwd EPS grth FY+1Fwd EPS grth FY+23-mth momNet cash/ debt (-)
McBride MCB£312m171p0.62152.1%29%13%10%-£86m
MJ Gleeson GLE£313m580p0.72141.7%19%10%10%£10m
Wizz Air  WIZZ£1.1bn1,873p0.1913-39%11%7.3%€584m
Communisis CMS£91m44p0.4084.6%20%14%6.1%-£34m
InterContinental Hotels  IHG£6.5bn2,752p0.982019%13%12%5.8%-$529m
Crest Nicholson  CRST£1.4bn573p0.3993.5%25%12%5.5%-£31m
Moss Bros  MOSB£103m105p0.85235.3%21%8.8%5.0%£19m
Morgan Sindall  MGNS£347m793p0.32113.7%18%21%4.3%£55m
Carnival CCL£28bn3,599p1.08152.4%27%12%2.9%-$7.4bn
Sepura SEPU£345m187p0.89191.3%44%16%2.6%-€90m
WPP WPP£20bn1,556p1.14162.5%9.1%9.3%1.3%-£3.4bn
Hilton Food  HFG£380m520p0.99204.4%7.3%16%0.2%-£2m
RSA Insurance  RSA£4.5bn445p0.38143.2%13%15%0.0%-£449m
NMC Health NMC£1.6bn887p0.81180.6%42%28%-0.4%-$409m
Bovis Homes  BVS£1.3bn961p0.3894.2%16%13%-0.6%£30m
Galliford Try GFRD£1.2bn1,453p0.51124.6%11%17%-0.8%-£109m
Go-Ahead  GOG£1.2bn2,580p0.39153.5%19%15%-1.0%£315m
TalkTalk Telecom  TALK£2.2bn235p0.58195.8%17%48%-1.8%-£644m

Source: S&P Capital IQ