Last week I mused over why my Peter Lynch Stalwarts screen had such a cyclical flavour to its share picks. There can be no such ponderings about my Late Bloomers screen, because it is designed to hunt out just such stocks, and hopefully those offering some recovery upside.
Given the volatility and generally negative direction of the market over the past 12 months, arguably this has not been the best time to target cyclicals - unless we're talking about resources stocks since February. Nevertheless, the Late Bloomer's screen did manage to outperform the market over the past 12 months, which was the second year that I've run it.
| Name | TIDM | Total Return (20 May 2015 - 10 May 2016) |
|---|---|---|
| AGA Rangemaster* | AGA | 60% |
| DCC | DCC | 29% |
| Telecom Plus | TEP | 20% |
| Go-Ahead | GOG | 1.0% |
| Braemar Shipping | BMS | -4.5% |
| Pendragon | PDG | -5.9% |
| SThree | STHR | -8.8% |
| Halfords | HFD | -9.1% |
| Keller | KLR | -12% |
| Grafton Group | GFTU | -15% |
| Hays | HAS | -19% |
| Robert Walters | RWA | -20% |
| Stagecoach | SGC | -35% |
| Carpetright | CPR | -44% |
| Late Bloomers | - | -4.6% |
| FTSE All Share | - | -8.0% |
*Taken over
Source: Thomson Datastream
The 2015 result builds on a good, although hardly showstopping, performance a year earlier. Over the two years, the screen boasts a cumulative total return of 13.2 per cent compared with a negative 0.7 per cent from the FTSE All-Share. If I factor in a 1.5 per cent annual charge to account for the cost associated with assembling and reshuffling the screen's picks, the total return drops to 9.8 per cent.
Source: Thomson Datastream
The logic behind this screen is to look for shares that seem cheap compared with sales (a low price-to-sales ratio, PSR), which is something of a classic indicator of contrarian value. A key explanation of why PSR is a great indicator of value is that it often identifies companies that have seen the profitability of their sales drop, causing a decline in earnings and a very negative reaction from the earnings-obsessed market. However, if sales manage to hold up, there can often be a chance that margins will recover in time. This, in turn, can lead to a speedy recovery in earnings and a re-rating based on those rising earnings. When low-PSR situations work out in this way, they can make extremely rewarding investments.
As well as looking for stocks with PSRs that look low compared with historic highs, the screen looks for margins that are low on the same basis. The screen is also interested in signs of financial strength as a strong balance sheet may be needed to support an earnings recovery. What's more, the screen wants to see sales moving upwards as an indication that trading may be improving.
The full criteria are:
■ PSR of less than one. ■ PSR at least one-third below 10-year peak. ■ Ebit margin at least a third below 10-year peak. ■ Net debt of 1.5 times cash profits or less. ■ Rising year-on-year sales in the past six months. ■ Positive free cash flow. nb financials are excluded from this screen |
This year, 15 FTSE All-Share stocks passed all the screen's tests, which are listed in order of lowest to highest PSR in the table below. I've taken a closer look at three of the picks, trying to focus on stocks that reflect major sector themes and which also highlight situations where the investment narrative may not entirely match the type of situation a screen has been designed to find.
15 CYCLICAL RECOVERY PLAYS
| Name | TIDM | Market cap | Price | PSR | Fwd NTM PE | DY | Fwd EPS grth FY+1 | Fwd EPS grth FY+2 | 3-month mom | Net Cash/ Debt(-) |
|---|---|---|---|---|---|---|---|---|---|---|
| Bloomsbury Publishing | BMY | £116m | 155p | 0.98 | 11 | 4.0% | -4.7% | 0.6% | 2.7% | £1m |
| Carpetright | CPR | £192m | 283p | 0.41 | 15 | - | 23.1% | 26.5% | -22.7% | £4m |
| Debenhams | DEB | £913m | 74p | 0.39 | 10 | 4.6% | 1.6% | 3.9% | -1.1% | -£224m |
| Flybe | FLYB | £120m | 56p | 0.20 | 21 | - | - | - | -21.6% | £68m |
| Grafton | GFTU | £1,589m | 675p | 0.71 | 14 | 1.9% | 15.4% | 12.3% | 6.7% | -£114m |
| Halfords | HFD | £809m | 416p | 0.78 | 13 | 4.0% | -3.5% | 1.5% | 9.0% | -£62m |
| Hays | HAS | £1,831m | 128p | 0.46 | 14 | 2.2% | 11.5% | 16.8% | 7.5% | -£56m |
| Headlam | HEAD | £419m | 496p | 0.64 | 15 | 4.2% | 0.5% | 4.9% | 7.8% | £44m |
| Lakehouse | LAKE | £74m | 47p | 0.18 | 5 | 4.0% | -19.6% | 9.6% | 18.2% | £6m |
| Morgan Sindall | MGNS | £348m | 793p | 0.15 | 11 | 3.7% | 17.7% | 14.3% | 13.8% | £55m |
| Robert Walters | RWA | £243m | 330p | 0.30 | 15 | 2.1% | 17.6% | 12.5% | 8.8% | £18m |
| Severfield | SFR | £159m | 54p | 0.72 | 16 | 1.9% | 46.5% | 22.0% | -7.8% | £13m |
| Stagecoach | SGC | £1,449m | 253p | 0.40 | 9 | 4.3% | 3.3% | -1.6% | -1.5% | -£461m |
| SThree | STHR | £433m | 338p | 0.51 | 14 | 4.1% | 18.5% | 15.2% | 13.8% | £6m |
| Go-Ahead | GOG | £1,096m | 2,553p | 0.33 | 15 | 3.6% | 18.2% | 15.7% | 16.9% | £315m |
Source: S&P CapitalIQ
