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.
Name | TIDM | Total return (24 Mar 2015 - 1 Mar 2016) |
---|---|---|
Anite* | AIE | 44.5% |
Crest Nicholson | CRST | 31.0% |
Carnival | CCL | 16.2% |
Barratt Developments | BDEV | 15.3% |
Galliford Try | GFRD | 2.5% |
Carclo | CAR | -2.4% |
Clarkson | CKN | -14.7% |
Keller | KLR | -14.8% |
Essentra | ESNT | -18.3% |
Cambian | CMBN | -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
Name | TIDM | Mkt cap | Price | GV ratio | Fwd NTM PE | DY | Fwd EPS grth FY+1 | Fwd EPS grth FY+2 | 3-mth mom | Net cash/ debt (-) |
---|---|---|---|---|---|---|---|---|---|---|
McBride | MCB | £312m | 171p | 0.62 | 15 | 2.1% | 29% | 13% | 10% | -£86m |
MJ Gleeson | GLE | £313m | 580p | 0.72 | 14 | 1.7% | 19% | 10% | 10% | £10m |
Wizz Air | WIZZ | £1.1bn | 1,873p | 0.19 | 13 | - | 39% | 11% | 7.3% | €584m |
Communisis | CMS | £91m | 44p | 0.40 | 8 | 4.6% | 20% | 14% | 6.1% | -£34m |
InterContinental Hotels | IHG | £6.5bn | 2,752p | 0.98 | 20 | 19% | 13% | 12% | 5.8% | -$529m |
Crest Nicholson | CRST | £1.4bn | 573p | 0.39 | 9 | 3.5% | 25% | 12% | 5.5% | -£31m |
Moss Bros | MOSB | £103m | 105p | 0.85 | 23 | 5.3% | 21% | 8.8% | 5.0% | £19m |
Morgan Sindall | MGNS | £347m | 793p | 0.32 | 11 | 3.7% | 18% | 21% | 4.3% | £55m |
Carnival | CCL | £28bn | 3,599p | 1.08 | 15 | 2.4% | 27% | 12% | 2.9% | -$7.4bn |
Sepura | SEPU | £345m | 187p | 0.89 | 19 | 1.3% | 44% | 16% | 2.6% | -€90m |
WPP | WPP | £20bn | 1,556p | 1.14 | 16 | 2.5% | 9.1% | 9.3% | 1.3% | -£3.4bn |
Hilton Food | HFG | £380m | 520p | 0.99 | 20 | 4.4% | 7.3% | 16% | 0.2% | -£2m |
RSA Insurance | RSA | £4.5bn | 445p | 0.38 | 14 | 3.2% | 13% | 15% | 0.0% | -£449m |
NMC Health | NMC | £1.6bn | 887p | 0.81 | 18 | 0.6% | 42% | 28% | -0.4% | -$409m |
Bovis Homes | BVS | £1.3bn | 961p | 0.38 | 9 | 4.2% | 16% | 13% | -0.6% | £30m |
Galliford Try | GFRD | £1.2bn | 1,453p | 0.51 | 12 | 4.6% | 11% | 17% | -0.8% | -£109m |
Go-Ahead | GOG | £1.2bn | 2,580p | 0.39 | 15 | 3.5% | 19% | 15% | -1.0% | £315m |
TalkTalk Telecom | TALK | £2.2bn | 235p | 0.58 | 19 | 5.8% | 17% | 48% | -1.8% | -£644m |
Source: S&P Capital IQ